PART
I
Unless the context requires otherwise,
references in this report to “Keryx,” “we,” “us” and “our” refer to Keryx
Biopharmaceuticals, Inc., our predecessor company and our respective
subsidiaries.
ITEM
1. BUSINESS.
OVERVIEW
We are a
biopharmaceutical company focused on the acquisition, development and
commercialization of medically important, novel pharmaceutical products for the
treatment of life-threatening diseases, including renal disease and cancer. We
are developing Zerenex™ (ferric citrate), an oral, iron-based compound that has
the capacity to bind to phosphate and form non-absorbable complexes. Zerenex is
currently in Phase 2 clinical development for the treatment of hyperphosphatemia
(elevated phosphate levels) in patients with end-stage renal disease, or ESRD.
We are also developing KRX-0401 (perifosine), a novel, potentially
first-in-class, oral anti-cancer agent that modulates Akt, a protein in the body
associated with tumor survival and growth. KRX-0401 also modulates a number of
other key signal transduction pathways, including the JNK and MAPK pathways,
which are pathways associated with programmed cell death, cell growth, cell
differentiation and cell survival. KRX-0401 is currently in Phase 2 clinical
development for multiple tumor types. We also actively engage in business
development activities that include evaluating compounds and companies for
in-licensing or acquisition, as well as seeking strategic relationships for our
product candidates and for our company. To date, we have not received approval
for the sale of any of our drug candidates in any market and, therefore, have
not generated any product sales from our drug candidates. We have generated, and
expect to continue to generate, revenue from the licensing of rights to Zerenex
in Japan to our Japanese partner, Japan Tobacco Inc. (“JT”) and Torii
Pharmaceutical Co., Ltd. (“Torii”).
The table
below summarizes the status of our key pipeline products. Each of
these drugs is discussed more fully under the heading “Products under
Development.”
Product
candidate
|
|
Target
indication
|
|
Development
status
|
Zerenex™
(ferric citrate)
|
|
Hyperphosphatemia
in patients with end-stage renal disease
|
|
Phase
2
|
|
|
|
|
|
KRX-0401
(perifosine)
|
|
Multiple
forms of cancer
|
|
Phase
2
|
OUR
STRATEGY
Our
mission is to create long-term shareholder value by acquiring, developing and
commercializing medically important, novel pharmaceutical products for the
treatment of life-threatening diseases, including renal disease and cancer. Our
strategy to achieve this mission is to:
|
●
|
seek
to acquire medically important, novel drug candidates in late pre-clinical
or early clinical development;
|
|
●
|
utilize
our clinical development capabilities to manage and drive our drug
candidates through the clinical development process to
approval;
|
|
●
|
identify
and explore licensing and partnership opportunities for our current drug
candidates; and
|
|
●
|
commercialize
our drug candidates, either alone or in partnership, which we believe is
important to provide maximum shareholder
value.
|
CORPORATE
INFORMATION
We were
incorporated in Delaware in October 1998. We commenced operations in November
1999, following our acquisition of substantially all of the assets and certain
of the liabilities of Partec Ltd., our predecessor company that began its
operations in January 1997. Our executive offices are located at 750 Lexington
Avenue, New York, New York 10022. Our telephone number is 212-531-5965, and our
e-mail address is info@keryx.com.
We
maintain a website with the address www.keryx.com. We make available free of
charge through our Internet website our annual reports on Form 10-K, quarterly
reports on Form 10-Q and current reports on Form 8-K, and any amendments to
these reports, as soon as reasonably practicable after we electronically file
such material with, or furnish such material to, the SEC. We are not including
the information on our website as a part of, nor incorporating it by reference
into, this report.
PRODUCTS
UNDER DEVELOPMENT
Zerenex
™ (ferric
citrate)
Overview
Zerenex
(ferric citrate) is an oral, iron-based compound that has the capacity to bind
to phosphate and form non-absorbable complexes. Zerenex is currently in Phase 2
clinical development for the treatment of hyperphosphatemia (elevated serum
phosphorous levels) in patients with ESRD in the United States and
Japan.
Market
Opportunity
In the U.S., according to data from the
U.S. Renal Data System, there are approximately 485,000 patients with end-stage
renal disease, or ESRD, and the number of ESRD patients is projected to rise 60%
to approximately 785,000 by 2020. The majority of ESRD patients, over
350,000, require dialysis. Phosphate retention and the resulting
hyperphosphatemia in patients with ESRD on dialysis are usually associated with
secondary hyperparathyroidism, renal osteodystrophy, soft tissue mineralization
and the progression of renal failure. ESRD patients usually require treatment
with phosphate-binding agents to lower and maintain serum phosphorus at
acceptable levels.
Aluminum-type
phosphate binders were widely used in the past. However, the systemic absorption
of aluminum from these agents and the potential toxicity associated with their
use no longer make this type of binder a viable long-term treatment
option.
Calcium-type
phosphate binders are commonly used to bind dietary phosphate; however, they
promote positive net calcium balance and an increased risk of metastatic
calcification in many patients, especially in those patients taking vitamin D
analogs and those with adynamic bone disease.
Non-calcium-based, non-absorbed
phosphate binders, including sevelamer hydrochloride and sevelamer carbonate are
among the most prescribed phosphate binders in the U.S. Compared to
the calcium-type binders, fewer coronary and aortic calcifications have been
documented, however, there is a risk of metabolic acidosis with sevelamer
hydrochloride, the potential for gastrointestinal problems, and sevelamer can
affect concomitant vitamin K and vitamin D treatment.
Lanthanum-type phosphate binders are
another alternative. Lanthanum is a rare earth element and is minimally absorbed
in the gastrointestinal tract. Lower level tissue deposition, particularly in
bone and liver, has been observed in animals. However, the long-term
effects due to the accumulation of lanthanum in these tissues have not been
clearly determined.
The need for alternative
phosphate-binding agents has long been recognized, especially given the
increasing prevalence of ESRD as well as shortcomings with current therapies.
Zerenex has the potential to be an effective and safe treatment in lowering
and/or maintaining serum phosphorus levels <5.5 mg/dL in patients with ESRD
and hyperphosphatemia.
Clinical
Data
In June
2006, we announced final results from the Phase 2 multi-center study entitled:
“A randomized, double-blind, placebo-controlled, dose ranging study of the
effects of Zerenex on serum phosphate in patients with end stage renal disease
(ESRD).” This Phase 2 study was conducted under an IND sponsored by our
licensors in both the United States and Taiwan.
From this
Phase 2 study, the investigators concluded that Zerenex appeared to have an
acceptable safety and tolerability profile at the 2, 4, and 6g/day dose. The
optimum dose of Zerenex in this study was 6g/day at which it appeared to be
efficacious, safe and well tolerated as treatment for hyperphosphatemia in
hemodialysis patients. Additionally, the investigators found that Zerenex
therapy for up to 28 days had no statistically significant effect on serum iron,
ferritin, transferrin saturation, or total iron binding
capacity.
The Phase
2 study was designed to determine the safety and efficacy of several doses of
Zerenex in patients with ESRD who were undergoing hemodialysis. In this study,
each of three Zerenex doses (2g, 4g and 6g) administered daily with meals was
compared to placebo. Patients who had been on other phosphate binders prior to
enrolling in this study underwent a 1-2-week washout period prior to
randomization. Patients who had a serum phosphorous level greater than or equal
to 5.5 mg/dl and less than or equal to 10 mg/dl by the end of this washout
period were eligible to be randomized to one of four treatment groups at a ratio
of 2:2:2:1, (Zerenex 2g, 4g, 6g and placebo, respectively) and were treated for
28 days. The primary endpoint for this study was the change in serum phosphorous
concentration at day 28 relative to baseline.
Of the
116 patients randomized in the study, 111 patients were evaluable for efficacy
at 28 days and were included in the analysis. At day 28, there was a
statistically significant dose response to Zerenex in reducing serum phosphorous
concentration (p=0.0073). In the 6g/day Zerenex group the mean decrease in serum
phosphorous concentration was statistically significant when compared with
placebo (p=0.0119) (see Table 1). There was also a statistically significant
dose response to Zerenex in the calcium x phosphorous (Ca x P) product at day 28
(p=0.0158). In the 6g/day Zerenex group the mean decrease in Ca x P product when
compared with placebo was statistically significant (p=0.0378) (See Table
2).
Table 1:
Changes in Serum Phosphorous
Concentration (mg/dL) on day 28 compared to day 0 (baseline) at Zerenex doses of
2, 4 and 6 g/day
|
|
Placebo
(n=16)
|
|
|
2g/day
(n=31)
|
|
|
4g/day
(n=32)
|
|
|
6g/day
(n=32)
|
|
Day
0 (Baseline)*
|
|
|
7.2
(1.4)
|
|
|
|
7.2
(1.2)
|
|
|
|
7.1
(1.3)
|
|
|
|
7.3
(1.3)
|
|
Day
28 (End of Treatment Period)*
|
|
|
7.2
(1.2)
|
|
|
|
6.9
(2.2)
|
|
|
|
6.0
(1.3)
|
|
|
|
5.8
(1.8)
|
|
Placebo
Comparison:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mean
Difference from Placebo
|
|
|
|
|
|
|
-0.02
|
|
|
|
-1.1
|
|
|
|
-1.5
|
|
P-value
|
|
|
|
|
|
NS
|
|
|
|
0.06
|
|
|
|
0.0119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Baseline
Comparison:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mean
Difference from Baseline
|
|
|
-0.1
|
|
|
|
-0.3
|
|
|
|
-1.1
|
|
|
|
-1.5
|
|
P-value
|
|
NS
|
|
|
NS
|
|
|
NS
|
|
|
<0.01
|
|
*mean
(standard deviation)
|
|
Table 2—Changes in the
Calcium x Phosphorous (mg/dL) on day 28 compared to day 0 (baseline) at Zerenex
doses of 2, 4 and 6 g/day
|
|
Placebo
(n=16)
|
|
|
2g/day
(n=31)
|
|
|
4g/day
(n=32)
|
|
|
6g/day
(n=32)
|
|
Day
0 (Baseline)*
|
|
62.8
(13.9)
|
|
|
62.9
(13.2)
|
|
|
63.5
(10.7)
|
|
|
65.8
(12.2)
|
|
Day
28 (End of Treatment Period)*
|
|
63.2
(12.6)
|
|
|
61.7
(21.3)
|
|
|
55.4
(13.4)
|
|
|
54.1
(17.7)
|
|
Placebo
Comparison:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mean
Difference from Placebo
|
|
|
|
|
|
-0.9
|
|
|
|
-7.91
|
|
|
|
-11.4
|
|
P-value
|
|
|
|
|
|
0.8950
|
|
|
|
0.1375
|
|
|
|
0.0378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Baseline
Comparison:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mean
Difference from Baseline
|
|
|
-0.3
|
|
|
|
-1.1
|
|
|
|
-8.1
|
|
|
|
-11.7
|
|
P-value
|
|
NS
|
|
|
NS
|
|
|
NS
|
|
|
<0.01
|
|
*mean
(standard deviation)
|
|
There
were no deaths over the course of the 28 day study and there were no serious
adverse events that were deemed by the investigators to be related to Zerenex.
The majority of adverse events were of mild severity. Seven (43.8%), 13 (39.4%),
9 (26.5%), and 14 (42.4%) patients in the placebo, 2, 4, and 6g treatment
groups, respectively, experienced no adverse events more severe than mild, and 1
(6.3%), 0 (0.0%), 2 (5.9%), 1 (3.0%), of the placebo, 2, 4, and 6 grams per day
groups, respectively, experienced at least one severe adverse event. Possibly or
probably related adverse effects occurred in 4 (25.0%), 7 (21.2%), 8 (23.5%),
and 7 (21.2%) of the placebo, 2, 4, and 6 grams per day groups,
respectively.
In
addition, Zerenex has been studied in two previous Phase 2 clinical trials using
single fixed dose regimens. In both studies, Zerenex was able to significantly
reduce serum phosphorous (p <.005), and the degree of reduction appeared to
be generally comparable to calcium-based products which were used as positive
control arms in those studies. The study was not designed to compare Zerenex to
calcium-based products, therefore, no formal assessment can be made of the
comparative efficacy.
In
December 2008, we completed our Phase 2 high-dose tolerance and safety study.
The goal of this study was to assess tolerability and safety in end-stage renal
disease patients with doses of Zerenex ranging from approximately 3.0 grams per
day to 12.0 grams per day. The open-label study was conducted in two parts by
the Collaborative Study Group utilizing seven sites in the U.S. Part 1 of the
study enrolled 34 patients. Patients taking approximately 6 to 15 capsules or
tablets per day of their current phosphate binder were immediately switched to a
starting dose of 4.5 grams per day of Zerenex, and were treated for 28 days.
Part 2 of the study enrolled 21 patients. In this part, patients taking
approximately 12 or more capsules or tablets per day of their current phosphate
binder were immediately switched to a starting dose of 6.0 grams per day of
Zerenex, and were treated for 28 days. In January 2009, we presented preliminary
results of part 1 of the study at the J.P. Morgan Annual Healthcare Conference.
In March 2009, we provided updated preliminary results for the entire study on
our fourth quarter and year-end financial results conference call. The
preliminary results for the entire study are found in the table
below.
|
|
Serum Phosphorous
(Mean +/- standard
deviation)
|
Visit
0 (Baseline)
|
|
5.8
+/- 1.5
|
Visit
4 (Treatment for 28 days)
|
|
5.4
+/- 1.3
|
The
average dose of Zerenex administered in this trial was 7.5 grams per day. There
were no observed changes in the following iron parameters: serum iron, ferritin,
transferrin, and total iron binding capacity, or intact parathyroid hormone.
Four serious adverse events were reported, all of which were deemed by the
investigators to be unrelated to Zerenex. The most commonly reported adverse
event was change in stool color, which is an expected side effect of Zerenex,
about which all of the patients were notified in advance, and no patients
withdrew from the study as a result. In addition, although not designed as an
efficacy clinical trial, Zerenex appeared to manage and control serum phosphorus
levels in patients who were switched from their current phosphorus binders
without washout to Zerenex.
Development
Status
In July
2006, we met with the FDA to discuss the further development of Zerenex,
including Phase 3 study design and requirements prior to moving into Phase 3. To
support higher doses and longer duration of treatment in Phase 3, we agreed with
the FDA to conduct additional studies. The FDA suggested additional animal
toxicity studies and a high dose Phase 2 study.
In August
2007, we provided the FDA with our 28-day toxicology package for rats and
canines.
In 2008,
we completed the dosing in the 90-day toxicology study in rats and 16-week
toxicology study in canines. The final reports for these studies were submitted
to the FDA in the first quarter of 2009. These studies will assist the Company
in designing the chronic toxicity studies, which we are planning, with our
Japanese partner, to initiate in 2009.
In 2008,
we completed our Phase 2 high-dose tolerance and safety study. Preliminary
results are presented above. We plan to meet with the FDA for an end of Phase 2
meeting in 2009 to discuss a Phase 3 program.
In
addition, in March 2009, our Japanese partner, JT and Torii, informed us that
they had initiated a Phase 2 clinical study of Zerenex in Japan, which triggered
a $3 million non-refundable milestone payment which was received by us in March
2009.
KRX-0401
(perifosine)
Overview
KRX-0401
(perifosine) is a novel, potentially first-in-class, oral anti-cancer agent that
modulates Akt, and a number of other key signal transduction pathways, including
the JNK and MAPK pathways, all of which are pathways associated with programmed
cell death, cell growth, cell differentiation and cell survival. The effects of
KRX-0401 on Akt are of particular interest because of the importance of this
pathway in the development of most cancers, with evidence that it is often
activated in tumors that are resistant to other forms of anticancer therapy, and
the difficulty encountered thus far in the discovery of drugs that will inhibit
this pathway without causing excessive toxicity. High levels of activated Akt
(pAkt) are seen frequently in many types of cancer and have been correlated with
poor prognosis.
To date,
over 1,800 patients have been treated with KRX-0401 in trials conducted both in
the United States and Europe. Its safety profile is distinctly different from
that of most cytotoxic agents. KRX-0401 does not appear to cause flu-like
symptoms, thrombocytopenia (decrease in platelets that may result in bleeding)
or alopecia (hair loss); all of these toxicities occur frequently with many of
the currently available treatments for cancer. The main side effects of KRX-0401
are nausea, vomiting, diarrhea and fatigue, but these are generally well-managed
particularly at lower daily doses (50 mg or 100 mg) that have induced tumor
regression. Responses have been seen with both daily and weekly regimens. At the
doses studied, the daily regimens were better tolerated.
Pre-Clinical
and Clinical Data Overview
In vitro
, KRX-0401 inhibits
the growth of a variety of human tumor cell lines and has substantial activity
in vivo
against a
number of murine tumor models and human xenografts. Investigators at the US
National Cancer Institute, or NCI, were among the first to study the effects of
KRX-0401 on Akt using a prostate cell line, PC-3, that is known to have
constitutively activated Akt. Their results demonstrated that
KRX-0401 blocked phosphorylation of Akt but did not decrease the total amount of
Akt present in the cell. In model systems, the drug appears to be
synergistic with radiotherapy and additive or synergistic with cytotoxics such
as cisplatin, doxorubicin, and cyclophosphamide. In these experiments, the
combination regimens were superior to chemotherapy alone and were well
tolerated. Recent pre-clinical data suggest that KRX-0401 may be additive or
synergistic with newer targeted agents such as the proteasome inhibitor
bortezomib (Velcade
®
), the
tyrosine kinase inhibitor sorafenib (Nexavar
®
), and
the mTOR inhibitor temsirolimus (Torisel
®
).
Seven
Phase 1 single agent studies of KRX-0401 have been completed; three in Europe by
Zentaris and four in the United States by the NCI, a department of the National
Institutes of Health, or NIH, as part of a Cooperative Research and Development
Agreement, or CRADA, and by us. These trials demonstrated that KRX-0401 can be
safely given to humans with a manageable toxicity profile. The dose limiting
toxicity in the Phase 1 studies was gastrointestinal: nausea, vomiting and
diarrhea.
Thirteen
Phase 1/2 studies of KRX-0401 in combination with other drugs have been
conducted by Keryx. Agents that have been included in these
combinations include gemcitabine, paclitaxel, docetaxel, prednisone,
doxorubicin, capecitabine, pemetrexed, irinotecan, Doxil
®
(doxorubicin HCl liposome
injection)
, trastuzumab, various endocrine therapies, imatinib,
bortezomib, lenalidomide, sorafenib, and sunitinib. KRX-0401 has
generally been well tolerated when used as a low daily dose (50 mg or 100 mg) in
combination with these approved agents. KRX-0401 has also been
studied in combination with radiotherapy without evidence of increased
toxicity.
The NCI
has completed a number of Phase 2 clinical trials studying KRX-0401 as a single
agent, including studies in prostate, breast, head and neck and pancreatic
cancers, as well as melanoma and sarcomas. In total, nine NCI clinical trials
have been conducted across these six tumor types.
KRX-0401
has also been evaluated in ten Phase 2 clinical studies conducted by Keryx
evaluating the single agent activity in various tumor types where patients have
progressed on standard treatments. Clinical trials where responses
have been reported have been conducted in patients with renal cell carcinoma,
advanced brain tumors, soft-tissue sarcomas, hepatocellular carcinoma, as well
as in hematologic malignancies including multiple myeloma and Waldenstrom’s
macroglobulinemia. As illustrated in the previous NCI trials, the
lower daily doses (50 mg or 100 mg) have been better tolerated than the
intermittent higher doses.
Multiple
Myeloma Clinical Data
In
December 2008, at the American Society of Hematology annual meeting, in an oral
presentation by Dr. Paul Richardson, Clinical Director of the Multiple Myeloma
Center at Dana-Farber Cancer Institute in Boston, we announced data on the
clinical activity of KRX-0401 in combination with bortezomib (with or without
dexamethasone) in patients with relapsed/refractory multiple myeloma. Updated
data was presented in a poster at the February 2009 International Multiple
Myeloma Workshop. This trial was designed as a Phase 1/2 study. The Phase 1
portion enrolled 18 patients and the Phase 2 portion enrolled 66 patients (total
of 84 patients), all with advanced multiple myeloma (83% relapsed and
refractory). Patients had a median of five lines of prior therapy and all
patients were previously treated with at least one course of therapy on
bortezomib (median number of prior bortezomib treatments was two). The percent
of patients who received other prior treatments included dexamethasone (98%),
lenalidomide (75%), thalidomide (74%) and stem cell transplant
(57%). In the Phase 1 portion, KRX-0401 was escalated from 50 to 100
mg once daily while bortezomib was escalated from 1.0 to 1.3 mg/m
2
. No
dose-limiting toxicity and no grade 3 peripheral neuropathy were reported.
Toxicities were generally well managed and tolerated. Dexamethasone, dosed at 20
mg the day of and day after each bortezomib dose, was added in patients with
progressive disease on the combination of KRX-0401 and bortezomib. The Phase 2
dose was selected at 50 mg of KRX-0401 once daily with 1.3 mg/m
2
of
bortezomib at the FDA approved schedule. Seventy-three patients in the Phase 1/2
study were evaluable for response, assessed by modified EBMT/Blade criteria. As
in the Phase 1, adverse events were generally well managed. Overall response
rate (ORR), defined as complete responses (CR), partial responses (PR) and minor
responses (MR), as well as stable disease (SD) was reported in all evaluable
patients and is presented in the table below. Additionally, data for the subsets
of patients who were previously refractory to bortezomib (progressed on or
within 60 days) and patients who relapsed (responded, then progressed after 60
days off-treatment) from prior bortezomib treatment are presented in the table
below.
Evaluable
Patients (
≥
2
cycles)
|
|
CR
|
|
|
PR
|
|
|
MR
|
|
|
ORR
|
|
|
SD > 3 months
|
|
Bortezomib
Relapsed (n=20)
|
|
|
2
|
|
|
|
10%
|
|
|
|
6
|
|
|
|
30%
|
|
|
|
3
|
|
|
|
15%
|
|
|
|
11
|
|
|
|
55%
|
|
|
|
9
|
|
|
|
45%
|
|
Bortezomib
Refractory (n=53)
|
|
|
1
|
|
|
|
2%
|
|
|
|
6
|
|
|
|
11%
|
|
|
|
10
|
|
|
|
19%
|
|
|
|
17
|
|
|
|
32%
|
|
|
|
24
|
|
|
|
45%
|
|
All
Evaluable Patients (n=73)
|
|
|
3
|
|
|
|
4%
|
|
|
|
12
|
|
|
|
16%
|
|
|
|
13
|
|
|
|
18%
|
|
|
|
28
|
|
|
|
38%
|
|
|
|
33
|
|
|
|
45%
|
|
Patients
who had previously relapsed on a bortezomib-based treatment had a median time to
progression of 8.5 months at the time of data presentation. The median time to
progression for all 73 evaluable study patients (both bortezomib relapsed and
refractory) was 6.4 months at the time of data presentation. The investigators
concluded that the combination of KRX-0401 and bortezomib (with or without
dexamethasone) was well tolerated and is active in heavily pre-treated and
relapsed/refractory multiple myeloma patients, including bortezomib-refractory
patients. The trial remains open with 16 patients continuing on study treatment
as of February 2009.
Development
Status
In March
2008, we implemented a strategic restructuring plan to reduce our cash burn rate
and re-focus our development efforts on programs and opportunities that we
believed were most likely to provide long-term shareholder value. As such,
during 2008, we closed enrollment to several clinical trials for KRX-0401 to
better focus on tumor types showing promise, such as multiple myeloma, renal
cell carcinoma, colorectal cancer and brain cancer.
We
believe that the data compiled to date, both with KRX-0401 used as single agent
and in combination with novel agents, continues to support the development of
KRX-0401 in Phase 2/3 trials for patients with advanced cancer. We are currently
exploring the design of a randomized Phase 3 placebo controlled clinical trial
in multiple myeloma.
COSTS
AND TIME TO COMPLETE PRODUCT DEVELOPMENT
The
information below provides estimates regarding the costs associated with the
completion of the current development phase and our current estimated range of
the time that will be necessary to complete that development phase for our key
pipeline products. We also direct your attention to the risk factors which could
significantly affect our ability to meet these cost and time estimates found in
this report in Item 1A under the heading “Risks Associated with Our Product
Development Efforts.”
Product
candidate
|
|
Target
indication
|
|
Development
status
|
|
Completion
of
phase
|
|
Estimated
cost to
complete
phase
|
Zerenex™
(ferric citrate)
|
|
Hyperphosphatemia
in patients
with
end-stage renal disease
|
|
Phase
2
|
|
Mid-2009
|
|
Approximately
$1
million
|
|
|
|
|
|
|
|
|
|
KRX-0401
(perifosine)
|
|
Multiple
forms of cancer
|
|
Phase
2
|
|
Mid-2009
|
|
Approximately
$1
million
|
Completion
dates and costs in the above table are estimates due to the uncertainties
associated with clinical trials and the related requirements of development. In
the cases where the requirements for clinical trials and development programs
have not been fully defined, or are dependent on the success of other trials, we
cannot estimate trial completion or cost with any certainty. The
actual spending on each trial during the year is also dependent on
funding. We therefore direct your attention to Item 7 under the
heading “Liquidity and Capital Resources.”
INTELLECTUAL
PROPERTY AND PATENTS
General
Patents
and other proprietary rights are very important to the development of our
business. We will be able to protect our proprietary technologies from
unauthorized use by third parties only to the extent that our proprietary rights
are covered by valid and enforceable patents, supported by regulatory data
exclusivity or are effectively maintained as trade secrets. It is our intention
to seek and maintain patent and trade secret protection for our drug candidates
and our proprietary technologies. As part of our business strategy, our policy
is to actively file patent applications in the United States and, when
appropriate, internationally to cover methods of use, new chemical compounds,
pharmaceutical compositions and dosing of the compounds and compositions and
improvements in each of these. We also rely on trade secret information,
technical know-how, innovation and agreements with third parties to continuously
expand and protect our competitive position. We have a number of patents and
patent applications related to our compounds and other technology, but we cannot
guarantee the scope of protection of the issued patents, or that such patents
will survive a validity or enforceability challenge, or that any of the pending
patent applications will issue as patents.
Generally,
patent applications in the United States are maintained in secrecy for a period
of 18 months or more. Since publication of discoveries in the scientific or
patent literature often lag behind actual discoveries, we are not certain that
we were the first to make the inventions covered by each of our pending patent
applications or that we were the first to file those patent applications. The
patent positions of biotechnology and pharmaceutical companies are highly
uncertain and involve complex legal and factual questions. Therefore, we cannot
predict the breadth of claims allowed in biotechnology and pharmaceutical
patents, or their enforceability. To date, there has been no consistent policy
regarding the breadth of claims allowed in biotechnology patents. Third parties
or competitors may challenge or circumvent our patents or patent applications,
if issued. If our competitors prepare and file patent applications in the United
States that claim technology also claimed by us, we may have to participate in
interference proceedings declared by the United States Patent and Trademark
Office to determine priority of invention, which could result in substantial
cost, even if the eventual outcome is favorable to us. Because of the extensive
time required for development, testing and regulatory review of a potential
product, it is possible that before we commercialize any of our products, any
related patent may expire or remain in existence for only a short period
following commercialization, thus reducing any advantage of the
patent.
If a
patent is issued to a third party containing one or more preclusive or
conflicting claims, and those claims are ultimately determined to be valid and
enforceable, we may be required to obtain a license under such patent or to
develop or obtain alternative technology. In the event of a
litigation involving a third party claim, an adverse outcome in the litigation
could subject us to significant liabilities to such third party, require us to
seek a license for the disputed rights from such third party, and/or require us
to cease use of the technology. Further, our breach of an existing
license or failure to obtain a license to technology required to commercialize
our products may seriously harm our business. We also may need to commence
litigation to enforce any patents issued to us or to determine the scope and
validity of third-party proprietary rights. Litigation would involve substantial
costs.
Pursuant
to our license for Zerenex (ferric citrate) with Panion & BF Biotech, Inc.,
or Panion, we have the exclusive commercial rights to a series of patent
applications worldwide, excluding certain Asian-Pacific countries. These patents
and patent applications cover a method of treatment of hyperphosphatemia in
patients with ESRD, as well as a method for the manufacture of ferric citrate.
Panion holds one use patent expiring 2017 (with extensions expected through
2020) and two manufacturing process patents (expiring 2023).
Pursuant
to our license for KRX-0401 (perifosine) with Aeterna Zentaris, Inc., we have
the exclusive commercial rights to a series of patents and patent applications
in the United States, Canada, and Mexico. These patents and patent applications
include a composition of matter patent expiring in 2013 (with extension possible
through 2018), as well as method of use patent application, in
combination with various other anticancer agents, which would expire
in 2022.
The
patent rights that we own or have licensed relating to our product candidates
are limited in ways that may affect our ability to exclude third parties from
competing against us if we obtain regulatory approval to market these product
candidates. In particular:
|
●
|
Our
composition of matter patent covering KRX-0401 (perifosine) expires in
2013 and we cannot assure that we can obtain an extension to 2018. We do
not hold a composition of matter patent covering Zerenex. Composition of
matter patents can provide protection for pharmaceutical products to the
extent that the specifically covered compositions are important. Upon
expiration of our composition of matter patent for KRX-0401, or for
Zerenex, where we do not have a composition of matter patent, competitors
who obtain the requisite regulatory approval can offer products with the
same composition as our products so long as the competitors do not
infringe any method of use patents that we may
hold.
|
|
●
|
For
our product candidates, the principal patent protection that covers or
those we expect will cover, our product candidate is a method of use
patent. This type of patent only protects the product when used or sold
for the specified method. However, this type of patent does not limit a
competitor from making and marketing a product that is identical to our
product that is labeled for an indication that is outside of the patented
method, or for which there is a substantial use in commerce outside the
patented method.
|
Moreover,
physicians may prescribe such a competitive identical product for indications
other than the one for which the product has been approved, or off-label
indications, that are covered by the applicable patents. Although such off-label
prescriptions may infringe or induce infringement of method of use patents, the
practice is common and such infringement is difficult to prevent or
prosecute.
In
addition, the limited patent protection described above may adversely affect the
value of our product candidates and may inhibit our ability to obtain a
corporate partner at terms acceptable to us, if at all.
Other
Intellectual Property Rights
We depend
upon trademarks, trade secrets, know-how and continuing technological advances
to develop and maintain our competitive position. To maintain the
confidentiality of trade secrets and proprietary information, we require our
employees, scientific advisors, consultants and collaborators, upon commencement
of a relationship with us, to execute confidentiality agreements and, in the
case of parties other than our research and development collaborators, to agree
to assign their inventions to us. These agreements are designed to protect our
proprietary information and to grant us ownership of technologies that are
developed in connection with their relationship with us. These agreements may
not, however, provide protection for our trade secrets in the event of
unauthorized disclosure of such information.
In
addition to patent protection, we may utilize orphan drug regulations or other
provisions of the Food, Drug and Cosmetic Act to provide market exclusivity for
certain of our drug candidates. Orphan drug regulations provide incentives to
pharmaceutical and biotechnology companies to develop and manufacture drugs for
the treatment of rare diseases, currently defined as diseases that exist in
fewer than 200,000 individuals in the United States, or, diseases that affect
more than 200,000 individuals in the United States but that the sponsor does not
realistically anticipate will generate a net profit. Under these provisions, a
manufacturer of a designated orphan drug can seek tax benefits, and the holder
of the first FDA approval of a designated orphan product will be granted a
seven-year period of marketing exclusivity for such FDA-approved orphan product.
We believe that KRX-0401 (perifosine) will be eligible for orphan drug
designation; however, we cannot assure that KRX-0401, or any other drug
candidates we may acquire or in-license, will obtain such orphan drug
designation or that we will be the first to receive FDA approval for such drugs
so as to be eligible for market exclusivity protection.
LICENSING
AGREEMENTS AND COLLABORATIONS
We have
formed strategic alliances with a number of companies for the manufacture and
commercialization of our products. Our current key strategic alliances are
discussed below.
AEterna
Zentaris Inc.
In
September 2002, we signed a commercial license agreement with Zentaris AG, a
wholly owned subsidiary of AEterna Zentaris Inc., relating to the development of
perifosine covering composition of matter and methods of treatment. This
agreement grants us the exclusive rights to perifosine (KRX-0401) in the United
States, Canada and Mexico. Zentaris is entitled to certain royalty payments, as
well as additional compensation upon successful achievement of certain
milestones. The license terminates upon the later of the expiration of all
underlying patent rights or ten years from the first commercial sale of KRX-0401
in any of the covered territories. We also have the right to extend the
agreement for an additional five years beyond the expiration of all underlying
patents.
Panion
& BF Biotech, Inc.
In
November 2005, we entered into a license agreement with Panion. Under the
license agreement, we have acquired the exclusive worldwide rights, excluding
certain Asian-Pacific countries, for the development and marketing of ferric
citrate (Zerenex). Panion is entitled to certain milestone payments, as
well as royalty payments on net sales of Zerenex. The license
terminates upon the expiration of all underlying patent rights.
Japan
Tobacco Inc. and Torii Pharmaceutical Co., Ltd.
In
September 2007, we entered into a sublicense agreement with Japan Tobacco Inc.
(“JT”) and Torii Pharmaceutical Co., Ltd. (“Torii”), JT's pharmaceutical
business subsidiary, under which JT and Torii obtained the exclusive rights for
the development and commercialization of Zerenex (ferric citrate) in Japan. The
licensing arrangement calls for JT and Torii to pay us up to $100 million in
up-front license fees and payments upon the achievement of pre-specified
milestones, including up to $20 million in up-front payments and near-term
milestones, of which Keryx received $12 million in October 2007 and $8 million
in April 2008. In March 2009, JT and Torii informed us that they had initiated a
Phase 2 clinical study of Zerenex in Japan, which triggered a $3 million
non-refundable milestone payment which was received by us in March 2009. In
addition, upon commercialization, JT and Torii will make royalty payments to
Keryx on net sales of ferric citrate in Japan. JT and Torii will be responsible
for the future development and commercialization costs in Japan.
COMPETITION
Competition
in the pharmaceutical and biotechnology industries is intense. Our competitors
include pharmaceutical companies and biotechnology companies, as well as
universities and public and private research institutions. In
addition, companies that are active in different but related fields represent
substantial competition for us. Many of our competitors have
significantly greater capital resources, larger research and development staffs
and facilities and greater experience in drug development, regulation,
manufacturing and marketing than we do. These organizations also compete with us
to recruit qualified personnel, attract partners for joint ventures or other
collaborations, and license technologies that are competitive with
ours. To compete successfully in this industry we must identify
novel and unique drugs or methods of treatment and then complete the development
of those drugs as treatments in advance of our competitors.
The drugs that we are attempting to develop will have to compete with
existing therapies. In addition, a large number of companies are pursuing the
development of pharmaceuticals that target the same diseases and conditions that
we are targeting. Other companies have products or drug candidates in various
stages of pre-clinical or clinical development to treat diseases for which we
are also seeking to discover and develop drug candidates. Some of these
potential competing drugs are further advanced in development than our drug
candidates and may be commercialized earlier. Additional information can be
found under “Risk Factors” within this report.
SUPPLY
AND MANUFACTURING
We have
limited experience in manufacturing products for clinical or commercial
purposes.
We have
established contract manufacturing relationships for the supply of Zerenex to
ensure that we will have sufficient material for clinical trials. In addition,
we are establishing the basis for commercial production capabilities. As with
any supply program, obtaining raw materials of the correct quality cannot be
guaranteed and we cannot ensure that we will be successful in this
endeavor.
We have
also established contract manufacturing relationships for the supply of
KRX-0401.
At the
time of commercial sale, to the extent possible and commercially practicable, we
would seek to engage a back-up supplier for each of our product candidates.
Until such time, we expect that we will rely on a single contract manufacturer
to produce each of our product candidates under current Good Manufacturing
Practice, or cGMP, regulations. Our third-party manufacturers have a limited
number of facilities in which our product candidates can be produced and will
have limited experience in manufacturing our product candidates in quantities
sufficient for conducting clinical trials or for commercialization. Our
third-party manufacturers will have other clients and may have other priorities
that could affect their ability to perform the work satisfactorily and/or on a
timely basis. Both of these occurrences would be beyond our
control.
We expect
to similarly rely on contract manufacturing relationships for any products that
we may in-license or acquire in the future. However, there can be no assurance
that we will be able to successfully contract with such manufacturers on terms
acceptable to us, or at all.
Contract
manufacturers are subject to ongoing periodic and unannounced inspections by the
FDA, the Drug Enforcement Agency and corresponding state agencies to ensure
strict compliance with cGMP and other state and federal regulations. Our
contractors in Europe face similar challenges from the numerous European Union
and member state regulatory agencies. We do not have control over third-party
manufacturers’ compliance with these regulations and standards, other than
through contractual obligations.
If we
need to change manufacturers after commercialization, the FDA and corresponding
foreign regulatory agencies must approve these new manufacturers in advance,
which will involve testing and additional inspections to ensure compliance with
FDA regulations and standards and may require significant lead times and delay.
Furthermore, switching manufacturers may be difficult because the number of
potential manufacturers is limited. It may be difficult or impossible for us to
find a replacement manufacturer quickly or on terms acceptable to us, or at
all.
GOVERNMENT
AND INDUSTRY REGULATION
Numerous
governmental authorities, principally the FDA and corresponding state and
foreign regulatory agencies, impose substantial regulations upon the clinical
development, manufacture and marketing of our drug candidates, as well as our
ongoing research and development activities. None of our drug candidates have
been approved for sale in any market in which we have marketing rights. Before
marketing in the United States, any drug that we develop must undergo rigorous
pre-clinical testing and clinical trials and an extensive regulatory approval
process implemented by the FDA under the Federal Food, Drug, and Cosmetic Act of
1938, as amended. The FDA regulates, among other things, the pre-clinical and
clinical testing, safety, efficacy, approval, manufacturing, record keeping,
adverse event reporting, packaging, labeling, storage, advertising, promotion,
export, sale and distribution of biopharmaceutical
products.
The
regulatory review and approval process is lengthy, expensive and uncertain. We
are required to submit extensive pre-clinical and clinical data and supporting
information to the FDA for each indication or use to establish a drug
candidate’s safety and efficacy before we can secure FDA approval. The approval
process takes many years, requires the expenditure of substantial resources and
may involve ongoing requirements for post-marketing studies or surveillance.
Before commencing clinical trials in humans, we must submit an IND to the FDA
containing, among other things, pre-clinical data, chemistry, manufacturing and
control information, and an investigative plan. Our submission of an IND may not
result in FDA authorization to commence a clinical trial.
The FDA
may permit expedited development, evaluation, and marketing of new therapies
intended to treat persons with serious or life-threatening conditions for which
there is an unmet medical need under its fast track drug development programs. A
sponsor can apply for fast track designation at the time of submission of an
IND, or at any time prior to receiving marketing approval of the new drug
application, or NDA. To receive fast track designation, an applicant must
demonstrate:
|
·
|
that
the drug is intended to treat a serious or life-threatening
condition;
|
|
·
|
that
the drug is intended to treat a serious aspect of the condition;
and
|
|
·
|
that
the drug has the potential to address unmet medical needs, and this
potential is being evaluated in the planned drug development
program.
|
The FDA
must respond to a request for fast track designation within 60 calendar days of
receipt of the request. Over the course of drug development, a product in a fast
track development program must continue to meet the criteria for fast track
designation. Sponsors of products in fast track drug development programs must
be in regular contact with the reviewing division of the FDA to ensure that the
evidence necessary to support marketing approval will be developed and presented
in a format conducive to an efficient review. Sponsors of products in fast track
drug development programs ordinarily are eligible for priority review and also
may be permitted to submit portions of an NDA to the FDA for review before the
complete application is submitted.
Sponsors
of drugs designated as fast track also may seek approval under the FDA’s
accelerated approval regulations under subpart H. Pursuant to subpart H, the FDA
may grant marketing approval for a new drug product on the basis of adequate and
well-controlled clinical trials establishing that the drug product has an effect
on a surrogate endpoint that is reasonably likely, based on epidemiologic,
therapeutic, pathophysiologic, or other evidence, to predict clinical benefit or
on the basis of an effect on a clinical endpoint other than survival or
irreversible morbidity. Approval will be subject to the requirement that
the applicant study the drug further to verify and describe its clinical benefit
where there is uncertainty as to the relation of the surrogate endpoint to
clinical benefit or uncertainty as to the relation of the observed clinical
benefit to ultimate outcome. Post-marketing studies are usually underway
at the time an applicant files the NDA. When required to be conducted,
such post-marketing studies must also be adequate and well-controlled. The
applicant must carry out any such post-marketing studies with due
diligence. Many companies who have been granted the right to utilize
an accelerated approval approach have failed to obtain approval. Moreover,
negative or inconclusive results from the clinical trials we hope to conduct or
adverse medical events could cause us to have to repeat or terminate the
clinical trials. Accordingly, we may not be able to complete the clinical trials
within an acceptable time frame, if at all.
Clinical
testing must meet requirements for institutional review board oversight,
informed consent and good clinical practices, and must be conducted pursuant to
an IND, unless exempted.
For
purposes of NDA approval, clinical trials are typically conducted in the
following sequential phases:
|
·
|
Phase 1
: The drug is
administered to a small group of humans, either healthy volunteers or
patients, to test for safety, dosage tolerance, absorption, metabolism,
excretion, and clinical
pharmacology.
|
|
·
|
Phase 2
: Studies are
conducted on a larger number of patients to assess the efficacy of the
product, to ascertain dose tolerance and the optimal dose range, and to
gather additional data relating to safety and potential adverse
events.
|
|
·
|
Phase 3
: Studies
establish safety and efficacy in an expanded patient
population.
|
|
·
|
Phase 4
: The FDA may
require Phase 4 post-marketing studies to find out more about the drug’s
long-term risks, benefits, and optimal use, or to test the drug in
different populations.
|
The
length of time necessary to complete clinical trials varies significantly and
may be difficult to predict. Clinical results are frequently susceptible to
varying interpretations that may delay, limit or prevent regulatory approvals.
Additional factors that can cause delay or termination of our clinical trials,
or that may increase the costs of these trials, include:
|
·
|
slow
patient enrollment due to the nature of the clinical trial plan, the
proximity of patients to clinical sites, the eligibility criteria for
participation in the study or other
factors;
|
|
·
|
inadequately
trained or insufficient personnel at the study site to assist in
overseeing and monitoring clinical trials or delays in approvals from a
study site’s review board;
|
|
·
|
longer
treatment time required to demonstrate efficacy or determine the
appropriate product dose;
|
|
·
|
insufficient
supply of the drug candidates;
|
|
·
|
adverse
medical events or side effects in treated patients;
and
|
|
·
|
ineffectiveness
of the drug candidates.
|
In
addition, the FDA may place a clinical trial on hold or terminate it if it
concludes that subjects are being exposed to an unacceptable health risk. Any
drug is likely to produce some toxicity or undesirable side effects in animals
and in humans when administered at sufficiently high doses and/or for a
sufficiently long period of time. Unacceptable toxicity or side effects may
occur at any dose level at any time in the course of studies in animals designed
to identify unacceptable effects of a drug candidate, known as toxicological
studies, or clinical trials of drug candidates. The appearance of any
unacceptable toxicity or side effect could cause us or regulatory authorities to
interrupt, limit, delay or abort the development of any of our drug candidates
and could ultimately prevent approval by the FDA or foreign regulatory
authorities for any or all targeted indications.
Before
receiving FDA approval to market a product, we must demonstrate that the product
is safe and effective for its intended use by submitting to the FDA an NDA
containing the pre-clinical and clinical data that have been accumulated,
together with chemistry and manufacturing and controls specifications and
information, and proposed labeling, among other things. The FDA may refuse to
accept an NDA for filing if certain content criteria are not met and, even after
accepting an NDA, the FDA may often require additional information, including
clinical data, before approval of marketing a product.
As part
of the approval process, the FDA must inspect and approve each manufacturing
facility. Among the conditions of approval is the requirement that a
manufacturer’s quality control and manufacturing procedures conform to cGMP.
Manufacturers must expend time, money and effort to ensure compliance with cGMP,
and the FDA conducts periodic inspections to certify compliance. It may be
difficult for our manufacturers or us to comply with the applicable cGMP and
other FDA regulatory requirements. If we, or our contract manufacturers, fail to
comply, then the FDA will not allow us to market products that have been
affected by the failure.
If the
FDA grants approval, the approval will be limited to those disease states,
conditions and patient populations for which the product is safe and effective,
as demonstrated through clinical studies. Further, a product may be marketed
only in those dosage forms and for those indications approved in the NDA.
Certain changes to an approved NDA, including, with certain exceptions, any
changes to labeling, require approval of a supplemental application before the
drug may be marketed as changed. Any products that we manufacture or distribute
pursuant to FDA approvals are subject to continuing regulation by the FDA,
including compliance with cGMP and the reporting of adverse experiences with the
drugs. The nature of marketing claims that the FDA will permit us to make in the
labeling and advertising of our products will be limited to those specified in
an FDA approval, and the advertising of our products will be subject to
comprehensive regulation by the FDA. Drugs approved under Subpart H carry
additional restrictions on marketing activities, including the requirement that
all promotional materials to be used in support of the product are pre-submitted
to FDA. Claims exceeding those that are approved will constitute a
violation of the Federal Food, Drug, and Cosmetic Act. Violations of the Federal
Food, Drug, and Cosmetic Act or regulatory requirements at any time during the
product development process, approval process, or after approval may result in
agency enforcement actions, including withdrawal of approval, recall, seizure of
products, injunctions, fines and/or civil or criminal penalties. Any agency
enforcement action could have a material adverse effect on our
business.
Should we
wish to market our products outside the United States, we must receive marketing
authorization from the appropriate foreign regulatory authorities. The
requirements governing the conduct of clinical trials, marketing authorization,
pricing and reimbursement vary widely from country to country. At present,
companies are typically required to apply for foreign marketing authorizations
at a national level. However, within the European Union, registration procedures
are available to companies wishing to market a product in more than one European
Union member state. Typically, if the regulatory authority is satisfied that a
company has presented adequate evidence of safety, quality and efficacy, then
the regulatory authority will grant a marketing authorization. This foreign
regulatory approval process, however, involves risks similar or identical to the
risks associated with FDA approval discussed above, and therefore we cannot
guarantee that we will be able to obtain the appropriate marketing authorization
for any product in any particular country.
Failure
to comply with applicable federal, state and foreign laws and regulations would
likely have a material adverse effect on our business. In addition, federal,
state and foreign laws and regulations regarding the manufacture and sale of new
drugs are subject to future changes. We cannot predict the likelihood, nature,
effect or extent of adverse governmental regulation that might arise from future
legislative or administrative action, either in the United States or
abroad.
RESEARCH
AND DEVELOPMENT
Company-sponsored
research and development expenses (excluding non-cash compensation and
discontinued operations) totaled $55,751,000 in 2006, $74,883,000 in 2007 and
$38,075,000 in 2008. “Other research and development expenses” consist primarily
of salaries and related personnel costs, fees paid to consultants and outside
service providers for clinical and laboratory development, facilities-related
and other expenses relating to the design, development, manufacture, testing,
and enhancement of our drug candidates and technologies, as well as expenses
related to in-licensing of new product candidates. See “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Overview.”
EMPLOYEES
As of
March 30, 2009, we had 17 full- and part-time employees. None of our employees
are represented by a collective bargaining agreement, and we have never
experienced a work stoppage. We consider our relations with our employees to be
good.
ITEM
1A. RISK
FACTORS
You
should carefully consider the following risks and uncertainties. If any of the
following occurs, our business, financial condition or operating results could
be materially harmed. These factors could cause the trading price of our common
stock to decline, and you could lose all or part of your
investment.
Risks Related to Our
Business
We
have a limited operating history and have incurred substantial operating losses
since our inception. We expect to continue to incur losses in the future and may
never become profitable.
We have a
limited operating history. You should consider our prospects in light of the
risks and difficulties frequently encountered by early stage companies. In
addition, we have incurred substantial operating losses since our inception and
expect to continue to incur operating losses for the foreseeable future and may
never become profitable. As of December 31, 2008, we had an accumulated deficit
of approximately $331.9 million and a deficiency in equity of $1.5 million. As
we continue our research and development efforts, we will incur increasing
losses. We may continue to incur substantial operating losses even if we begin
to generate revenues from our drug candidates.
We have
not yet commercialized any of our drug candidates and cannot be sure we will
ever be able to do so. Even if we commercialize one or more of our drug
candidates, we may not become profitable. Our ability to achieve profitability
depends on a number of factors, including our ability to complete our
development efforts, obtain regulatory approval for our drug candidates,
successfully complete any post-approval regulatory obligations and successfully
commercialize our drug candidates.
Risks Associated with Our
Product Development Efforts
If
we are unable to successfully complete our clinical trial programs, or if such
clinical trials take longer to complete than we project, our ability to execute
our current business strategy will be adversely affected.
Whether
or not and how quickly we complete clinical trials is dependent in part upon the
rate at which we are able to engage clinical trial sites and, thereafter, the
rate of enrollment of patients, and the rate we collect, clean, lock and analyze
the clinical trial database. Patient enrollment is a function of many factors,
including the size of the patient population, the proximity of patients to
clinical sites, the eligibility criteria for the study, the existence of
competitive clinical trials, and whether existing or new drugs are approved for
the indication we are studying. We are aware that other companies are planning
clinical trials that will seek to enroll patients with the same diseases as we
are studying. Certain clinical trials are designed to continue until a
pre-determined number of events have occurred to the patients enrolled. Trials
such as this are subject to delays stemming from patient withdrawal and from
lower than expected event rates and may also incur increased costs if enrollment
is increased in order to achieve the desired number of events. If we experience
delays in identifying and contracting with sites and/or in patient enrollment in
our clinical trial programs, we may incur additional costs and delays in our
development programs, and may not be able to complete our clinical trials on a
cost-effective or timely basis. In addition, conducting multi-national studies
adds another level of complexity and risk as we are subject to events affecting
countries outside the United States. Moreover, negative or inconclusive
results from the clinical trials we conduct or adverse medical events could
cause us to have to repeat or terminate the clinical trials. Accordingly, we may
not be able to complete the clinical trials within an acceptable time frame, if
at all.
Additionally,
we have never filed a new drug application, or NDA, or similar application for
approval in the United States or in any country, which may result in a delay in,
or the rejection of, our filing of an NDA or similar application. During the
drug development process, regulatory agencies will typically ask questions of
drug sponsors. While we endeavor to answer all such questions in a timely
fashion, or in the NDA filing, some questions may not be answered by the time we
file our NDA. Unless the FDA waives the requirement to answer any such
unanswered questions, submission of an NDA may be delayed or
rejected.
Pre-clinical
testing and clinical development are long, expensive and uncertain processes. If
our drug candidates do not receive the necessary regulatory approvals, we will
be unable to commercialize our drug candidates.
We have
not received, and may never receive, regulatory approval for the commercial sale
of any of our drug candidates. We will need to conduct significant additional
research and human testing before we can apply for product approval with the FDA
or with regulatory authorities of other countries. Pre-clinical testing and
clinical development are long, expensive and uncertain processes. Satisfaction
of regulatory requirements typically depends on the nature, complexity and
novelty of the product and requires the expenditure of substantial resources.
Data obtained from pre-clinical and clinical tests can be interpreted in
different ways, which could delay, limit or prevent regulatory approval. It may
take us many years to complete the testing of our drug candidates and failure
can occur at any stage of this process. Negative or inconclusive results or
medical events during a clinical trial could cause us to delay or terminate our
development efforts.
Furthermore,
interim results of preclinical or clinical studies do not necessarily predict
their final results, and acceptable results in early studies might not be
obtained in later studies. Safety signals detected during clinical studies and
pre-clinical animal studies, such as the gastrointestinal bleeding that has been
seen in some high-dose, ferric citrate canine studies, may require us to do
additional studies, which could delay the development of the drug or lead to a
decision to discontinue development of the drug. Drug candidates in the later
stages of clinical development may fail to show the desired safety and efficacy
traits despite positive results in initial clinical testing. Results from
earlier studies may not be indicative of results from future clinical trials and
the risk remains that a pivotal program may generate efficacy data that will be
insufficient for the approval of the drug, or may raise safety concerns that may
prevent approval of the drug. Interpretation of the prior pre-clinical and
clinical safety and efficacy data of our drug candidates may be flawed and there
can be no assurance that safety and/or efficacy concerns from the prior data
were overlooked or misinterpreted, which in subsequent, larger studies appear
and prevent approval of such drug candidates. We will need to re-input our
safety information on KRX-0401 into a Good Clinical Practice-compliant database
and can provide no assurance that safety concerns will not subsequently
arise.
Clinical
trials have a high risk of failure. A number of companies in the pharmaceutical
industry, including biotechnology companies, have suffered significant setbacks
in advanced clinical trials, even after achieving what appeared to be promising
results in earlier trials. If we experience delays in the testing or approval
process or if we need to perform more or larger clinical trials than originally
planned, our financial results and the commercial prospects for our drug
candidates may be materially impaired. In addition, we have limited experience
in conducting and managing the clinical trials necessary to obtain regulatory
approval in the United States and abroad and, accordingly, may encounter
unforeseen problems and delays in the approval process. Though we may engage a
clinical research organization with experience in conducting regulatory trials,
errors in the conduct, monitoring and/or auditing could invalidate the results
from a regulatory perspective.
Because
all of our proprietary technologies are licensed to us by third parties,
termination of these license agreements would prevent us from developing our
drug candidates.
We do not
own any of our drug candidates. We have licensed the rights, patent or
otherwise, to our drugs candidates from third parties. These license agreements
require us to meet development milestones and impose development and
commercialization due diligence requirements on us. In addition, under these
agreements, we must pay royalties on sales of products resulting from licensed
technologies and pay the patent filing, prosecution and maintenance costs
related to the licenses. If we do not meet our obligations in a timely manner or
if we otherwise breach the terms of our license agreements, our licensors could
terminate the agreements, and we would lose the rights to our drug candidates.
From time to time, in the ordinary course of business, we may have disagreements
with our licensors or collaborators regarding the terms of our agreements or
ownership of proprietary rights, which could lead to delays in the research,
development and commercialization of our drug candidates or could require or
result in litigation or arbitration, which would be time-consuming and
expensive.
We
rely on third parties to manufacture and analytically test our products. If
these third parties do not successfully manufacture and test our products, our
business will be harmed.
We have
limited experience in manufacturing products for clinical or commercial
purposes. We intend to continue, in whole or in part, to use third parties to
manufacture and analytically test our products for use in clinical trials and
for future sales. We may not be able to enter into future contract agreements
with these third-parties on terms acceptable to us, if at all.
Contract
manufacturers often encounter difficulties in scaling up production, including
problems involving raw material supplies, production yields, quality control and
assurance, shortage of qualified personnel, compliance with FDA and foreign
regulations, production costs and development of advanced manufacturing
techniques and process controls. These risks become more acute as we
scale up for commercial quantities, where a reliable source of raw material
supplies becomes critical to commercial success. For example, given
the large quantity of materials required for ferric citrate production, as we
approach commercialization for Zerenex we will need to ensure an adequate supply
of starting materials that meet quality, quantity and cost
standards. Failure to achieve this level of supply can jeopardize the
successful commercialization of the product.
Our
third-party manufacturers may not perform as agreed or may not remain in the
contract manufacturing business for the time required by us to successfully
produce and market our drug candidates. In addition, our contract manufacturers
will be subject to ongoing periodic and unannounced inspections by the FDA and
corresponding foreign governmental agencies to ensure strict compliance with
current Good Manufacturing Practices, as well as other governmental regulations
and corresponding foreign standards. The same issues apply to contract
analytical services which we use for testing of our products. We will not have
control over, other than by contract and periodic oversight, third-party
manufacturers' compliance with these regulations and standards. We are currently
developing analytical tools for ferric citrate active pharmaceutical ingredient
testing. Failure to develop effective analytical tools could result in
regulatory or technical delay or could jeopardize our ability to begin Phase 3
clinical trials and/or obtain FDA approval. Switching or engaging multiple
third-party contractors to produce our products may be difficult because the
number of potential manufacturers may be limited and the process by which
multiple manufacturers make the drug substance must be identical at each
manufacturing facility. It may be difficult for us to find and engage
replacement or multiple manufacturers quickly and on terms acceptable to us, if
at all.
For
Zerenex, we currently rely on a sole source of ferric citrate active
pharmaceutical ingredient. The loss of this sole source of supply would result
in significant additional costs and delays in our development program.
Moreover, if we need to change manufacturers after commercialization, the
FDA and corresponding foreign regulatory agencies must approve these
manufacturers in advance, which will involve testing and additional inspections
to ensure compliance with FDA and foreign regulations and
standards.
If
we do not establish or maintain manufacturing, drug development and marketing
arrangements with third parties, we may be unable to commercialize our
products.
We do not
possess all of the capabilities to fully commercialize our products on our own.
From time to time, we may need to contract with third parties to:
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manufacture
our product candidates;
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assist
us in developing, testing and obtaining regulatory approval for and
commercializing some of our compounds and technologies;
and
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market
and distribute our drug products.
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We can
provide no assurance that we will be able to successfully enter into agreements
with such third parties on terms that are acceptable to us, if at all. If we are
unable to successfully contract with third parties for these services when
needed, or if existing arrangements for these services are terminated, whether
or not through our actions, or if such third parties do not fully perform under
these arrangements, we may have to delay, scale back or end one or more of our
drug development programs or seek to develop or commercialize our products
independently, which could result in delays. Furthermore, such failure could
result in the termination of license rights to one or more of our products. If
these manufacturing, development or marketing agreements take the form of a
partnership or strategic alliance, such arrangements may provide our
collaborators with significant discretion in determining the efforts and
resources that they will apply to the development and commercialization of our
products. Accordingly, to the extent that we rely on third parties to research,
develop or commercialize our products, we are unable to control whether such
products will be scientifically or commercially successful. Additionally, if
these third parties fail to perform their obligations under our agreements with
them or fail to perform their work in a satisfactory manner, in spite of our
efforts to monitor and ensure the quality of such work, we may face delays in
achieving the regulatory milestones required for commercialization of one or
more drug candidates.
Given the
current market conditions for raising capital, and given our limited resources,
we may be forced to further restructure our workforce, and thus rely
predominantly or entirely on our ability to contract with third parties for our
manufacturing, drug development and marketing. If we are unable to contract with
such third parties, we may be forced to limit or suspend or terminate the
development of some or all of our product candidates, including, without
limitation, suspending development of KRX-0401 (perifosine) and/or Zerenex
(ferric citrate).
Our
reliance on third parties, such as clinical research organizations, or CROs, may
result in delays in completing, or a failure to complete, clinical trials if
such CROs fail to perform under our agreements with them.
In the
course of product development, we engage CROs to conduct and manage clinical
studies and to assist us in guiding our products through the FDA review and
approval process. If the CROs fail to perform their obligations under
our agreements with them or fail to perform clinical trials in a satisfactory
manner, we may face delays in completing our clinical trials, as well as
commercialization of one or more drug candidates. Furthermore, any loss or delay
in obtaining contracts with such entities may also delay the completion of our
clinical trials and the market approval of drug candidates.
Other Risks Related to Our
Business
If
we are unable to develop adequate sales, marketing or distribution capabilities
or enter into agreements with third parties to perform some of these functions,
we will not be able to commercialize our products effectively.
In the
event that one or more of our drug candidates are approved by the FDA, we
currently plan to conduct our own sales and marketing effort to support the
drugs. We currently have limited experience in sales, marketing or distribution.
To directly market and distribute any products, we must build a sales and
marketing organization with appropriate technical expertise and distribution
capabilities. We may attempt to build such a sales and marketing organization on
our own or with the assistance of a contract sales organization. For some market
opportunities, we may want or need to enter into co-promotion or other licensing
arrangements with larger pharmaceutical or biotechnology firms in order to
increase the commercial success of our products. We may not be able to establish
sales, marketing and distribution capabilities of our own or enter into such
arrangements with third parties in a timely manner or on acceptable terms. To
the extent that we enter into co-promotion or other licensing arrangements, our
product revenues are likely to be lower than if we directly marketed and sold
our products, and some or all of the revenues we receive will depend upon the
efforts of third parties, and these efforts may not be successful. Additionally,
building marketing and distribution capabilities may be more expensive than we
anticipate, requiring us to divert capital from other intended purposes or
preventing us from building our marketing and distribution capabilities to the
desired levels.
Notwithstanding
our current plans to commercialize our drug candidates, from time to time we may
consider offers or hold discussions with companies for partnerships or the
acquisition of our company or any of our products. Any accepted offer may
preclude us from the execution of our current business plan.
Even
if we obtain FDA approval to market our drug products, if they fail to achieve
market acceptance, we will never record meaningful revenues.
Even if
our products are approved for sale, they may not be commercially successful in
the marketplace. Market acceptance of our drug products will depend on a number
of factors, including:
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perceptions
by members of the health care community, including physicians, of the
safety and efficacy of our product
candidates;
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the
rates of adoption of our products by medical practitioners and the target
populations for our products;
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the
potential advantages that our products offer over existing treatment
methods;
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the
cost-effectiveness of our products relative to competing
products;
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the
availability of government or third-party payor reimbursement for our
products;
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the
side effects or unfavorable publicity concerning our products or similar
products; and
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the
effectiveness of our sales, marketing and distribution
efforts.
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Because
we expect sales of our products, if approved, to generate substantially all of
our revenues in the long-term, the failure of our drugs to find market
acceptance would harm our business and could require us to seek additional
financing or other sources of revenue.
If
our competitors develop and market products that are less expensive, more
effective or safer than our drug products, our commercial opportunities may be
reduced or eliminated.
The
pharmaceutical industry is highly competitive. Our competitors include
pharmaceutical companies and biotechnology companies, as well as universities
and public and private research institutions. In addition, companies that are
active in different but related fields represent substantial competition for us.
Many of our competitors have significantly greater capital resources, larger
research and development staffs and facilities and greater experience in drug
development, regulation, manufacturing and marketing than we do. These
organizations also compete with us to recruit qualified personnel, attract
partners for joint ventures or other collaborations, and license technologies
that are competitive with ours. As a result, our competitors may be able to more
easily develop technologies and products that could render our drug products
obsolete or noncompetitive. To compete successfully in this industry we must
identify novel and unique drugs or methods of treatment and then complete the
development of those drugs as treatments in advance of our
competitors.
The drugs
that we are attempting to develop will have to compete with existing therapies.
For example, Zerenex, if approved in the United States, would compete with other
FDA approved phosphate binders such as Renagel® (sevelamer hydrochloride) and
Renvela® (sevelamer carbonate), both marketed by Genzyme Corporation, PhosLo®
(calcium acetate), marketed by Fresenius Medical Care, and Fosrenol® (lanthanum
carbonate), marketed by Shire Pharmaceuticals Group plc, as well as
over-the-counter calcium carbonate products such as TUMS® and metal-based
options such as aluminum and magnesium. A generic formulation of PhosLo®
manufactured by Roxane Laboratories, Inc. was launched in the United States in
October 2008. KRX-0401 (perifosine), if approved in the United States would
compete with other anti-cancer agents, such as mTOR inhibitors. Wyeth Corp.,
Novartis AG and Ariad Pharmaceuticals are developing mTOR inhibitors for use in
cancer and Wyeth’s mTOR inhibitor, temsirolimus, has been approved to treat
patients with advanced kidney disease. Biotechnology companies such as Amgen
Inc., Biogen-Idec, Inc., ImClone Systems, Inc. (a wholly-owned subsidiary of Eli
Lilly and Company), Millennium Pharmaceuticals, Inc., Onyx Pharmaceuticals,
Inc., OSI Pharmaceuticals, Inc. and Vertex Pharmaceuticals, Inc. are developing
and, in some cases, marketing drugs to treat various diseases, including cancer,
by inhibiting cell-signaling pathways. In addition, we are aware of a number of
small and large companies developing competitive products that target the Akt
pathway.
Our
commercial opportunities may be reduced or eliminated if our competitors develop
and market products that are less expensive, more effective or safer than our
drug products. Other companies have drug candidates in various stages of
pre-clinical or clinical development to treat diseases for which we are also
seeking to discover and develop drug products. Some of these potential competing
drugs are further advanced in development than our drug candidates and may be
commercialized earlier. Even if we are successful in developing effective drugs,
our products may not compete successfully with products produced by our
competitors.
If
we lose our key personnel or are unable to attract and retain additional
personnel, our operations could be disrupted and our business could be
harmed.
As of
March 30, 2009, we had 17 full and part-time employees. To successfully develop
our drug candidates, we must be able to attract and retain highly skilled
personnel. Our limited resources may hinder our efforts to attract and retain
highly skilled personnel. In addition, if we lose the services of our current
personnel, in particular, Michael S. Weiss, our Chairman and Chief Executive
Officer, our ability to continue to execute on our business plan could be
materially impaired. Although we have an employment agreement with Mr. Weiss,
this agreement does not prevent him from terminating his employment with
us.
Any
acquisitions we make may require a significant amount of our available cash and
may not be scientifically or commercially successful.
As part
of our business strategy, we may effect acquisitions to obtain additional
businesses, products, technologies, capabilities and personnel. If we make one
or more significant acquisitions in which the consideration includes cash, we
may be required to use a substantial portion of our available
cash.
Acquisitions
involve a number of operational risks, including:
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difficulty
and expense of assimilating the operations, technology and personnel of
the acquired business;
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our
inability to retain the management, key personnel and other employees of
the acquired business;
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our
inability to maintain the acquired company's relationship with key third
parties, such as alliance partners;
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exposure
to legal claims for activities of the acquired business prior to the
acquisition;
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the
diversion of our management's attention from our core business;
and
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the
potential impairment of goodwill and write-off of in-process research and
development costs, adversely affecting our reported results of
operations.
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The
status of reimbursement from third-party payors for newly approved health care
drugs is uncertain and failure to obtain adequate reimbursement could limit our
ability to generate revenue.
Our
ability to commercialize pharmaceutical products may depend, in part, on the
extent to which reimbursement for the products will be available
from:
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government
and health administration
authorities;
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private
health insurers;
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managed
care programs; and
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other
third-party payors.
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Significant
uncertainty exists as to the reimbursement status of newly approved health care
products. Third-party payors, including Medicare, are challenging the prices
charged for medical products and services. Government and other third-party
payors increasingly are attempting to contain health care costs by limiting both
coverage and the level of reimbursement for new drugs and by refusing, in some
cases, to provide coverage for uses of approved products for disease indications
for which the FDA has not granted labeling approval. Third-party insurance
coverage may not be available to patients for our products. If government and
other third-party payors do not provide adequate coverage and reimbursement
levels for our products, their market acceptance may be reduced.
Health care
reform measures could adversely affect our business.
The
business and financial condition of pharmaceutical and biotechnology companies
are affected by the efforts of governmental and third-party payors to contain or
reduce the costs of health care. In the United States and in foreign
jurisdictions there have been, and we expect that there will continue to be, a
number of legislative and regulatory proposals aimed at changing the health care
system, such as proposals relating to the reimportation of drugs into the U.S.
from other countries (where they are then sold at a lower price) and government
control of prescription drug pricing. The pendency or approval of such proposals
could result in a decrease in our stock price or limit our ability to raise
capital or to obtain strategic partnerships or licenses.
We
face product liability risks and may not be able to obtain adequate
insurance.
The use
of our drug candidates in clinical trials, the future sale of any approved drug
candidates and new technologies, and our sale of Accumin prior to its
discontinuation, exposes us to liability claims. Although we are not aware of
any historical or anticipated product liability claims against us, if we cannot
successfully defend ourselves against product liability claims, we may incur
substantial liabilities or be required to cease clinical trials of our drug
candidates or limit commercialization of any approved
products.
We
believe that we have obtained sufficient product liability insurance coverage
for our clinical trials and the sale of Accumin prior to its discontinuation. We
intend to expand our insurance coverage to include the commercial sale of any
approved products if marketing approval is obtained; however, insurance coverage
is becoming increasingly expensive. We may not be able to maintain insurance
coverage at a reasonable cost. We also may not be able to obtain additional
insurance coverage that will be adequate to cover product liability risks that
may arise. Regardless of merit or eventual outcome, product liability claims may
result in:
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decreased
demand for a product;
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injury
to our reputation;
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our
inability to continue to develop a drug
candidate;
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withdrawal
of clinical trial volunteers; and
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Consequently,
a product liability claim or product recall may result in losses that could be
material.
In
connection with providing our clinical trial management and site recruitment
services, we may be exposed to liability that could have a material adverse
effect on our financial condition and results of operations.
The
Online Collaborative Oncology Group, Inc., or OCOG, a subsidiary we acquired
through our acquisition of ACCESS Oncology in 2004, provides clinical trial
management and site recruitment services to us as well as other biotechnology
and pharmaceutical companies. In conducting the activities of OCOG, any failure
on our part to comply with applicable governmental regulations or contractual
obligations could expose us to liability to our clients and could have a
material adverse effect on us. We also could be held liable for errors or
omissions in connection with the services we perform. In addition, the wrongful
or erroneous delivery of health care information or services may expose us to
liability. If we were required to pay damages or bear the costs of defending any
such claims, the losses could be material.
Our
corporate compliance efforts cannot guarantee that we are in compliance with all
potentially applicable regulations.
The
development, manufacturing, pricing, sales, and reimbursement of our products,
together with our general operations, are subject to extensive regulation by
federal, state and other authorities within the United States and numerous
entities outside of the United States. We are a relatively small company with 17
full and part-time employees as of March 30, 2009. We also have significantly
fewer employees than many other companies that have a product candidate in
clinical development, and we rely heavily on third parties to conduct many
important functions. While we believe that our corporate compliance program is
sufficient to ensure compliance with applicable regulations, we cannot assure
you that we are or will be in compliance with all potentially applicable
regulations. If we fail to comply with any of these regulations we could be
subject to a range of regulatory actions, including suspension or termination of
clinical trials, the failure to approve a product candidate, restrictions on our
products or manufacturing processes, withdrawal of products from the market,
significant fines, or other sanctions or litigation.
Risks Related to Our
Financial Condition
Our
current cash, cash equivalents and investment securities may not be adequate to
support our operations for the length of time that we have
estimated.
We
currently anticipate that our cash, cash equivalents and investment securities
as of December 31, 2008, exclusive of our holdings in auction rate securities
and inclusive of a $3 million milestone payment received by us in March 2009
under our sublicense agreement for Zerenex in Japan, are sufficient to meet our
anticipated working capital needs and fund our business plan through the end of
2009. However, if we are not able to receive proceeds from some portion of our
auction rate securities by the first quarter of 2010, we may not have the
ability to continue as a going concern for any significant period beyond that
point. We are evaluating market conditions to determine the appropriate timing
and extent to which we will seek to obtain additional debt, equity or other type
of financing. If we determine that it is necessary to seek additional funding,
there can be no assurance that we will be able to obtain any such funding on
terms that are acceptable to us, if at all.
In
addition, the report of our independent registered public accounting firm
covering our 2008 Consolidated Financial Statements, included in this Annual
Report, contains an explanatory paragraph that makes reference to uncertainty
about our ability to continue as a going concern. Future reports may continue to
contain this explanatory paragraph. Our forecast of the period of
time through which our cash, cash equivalents and investment securities will be
adequate to support our operations is a forward-looking statement that involves
risks and uncertainties. The actual amount of funds we will need to operate is
subject to many factors, some of which are beyond our control. These factors
include the following:
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the
timing, design and conduct of, and results from, clinical trials for our
drug candidates;
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the
timing of expenses associated with manufacturing and product development
of the proprietary drug candidates within our portfolio and those that may
be in-licensed, partnered or
acquired;
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the
timing of the in-licensing, partnering and acquisition of new product
opportunities;
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the
progress of the development efforts of parties with whom we have entered,
or may enter, into research and development
agreements;
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our
ability to achieve our milestones under our licensing
arrangements;
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the
value and liquidity of our investment securities, including our
investments in auction rate securities;
and
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the
costs involved in prosecuting and enforcing patent claims and other
intellectual property rights.
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If our
capital resources are insufficient to meet future capital requirements, we will
have to raise additional funds. If we are unable to obtain additional funds on
terms favorable to us or at all, we may be required to cease or reduce our
operating activities or sell or license to third parties some or all of our
intellectual property. If we raise additional funds by selling additional shares
of our capital stock, the ownership interests of our stockholders will be
diluted. If we need to raise additional funds through the sale or license of our
intellectual property, we may be unable to do so on terms favorable to us, if at
all.
With
respect to our auction rate securities, we will continue to attempt to sell
these securities until the auctions are successful. If uncertainties in the
credit and capital markets continue, these markets deteriorate further or we
experience any credit rating downgrades on the auction rate securities in our
portfolio, we may incur additional impairment charges with respect to our
auction rate securities portfolio, which could negatively affect our financial
condition, cash flow and reported earnings. We continue to monitor the fair
value of our auction rate securities and relevant market conditions and will
recognize additional impairment charges if future circumstances warrant such
charges. In addition, the lack of liquidity of our auction rate securities could
have a material impact on our ability to fund our operations.
Risks Related to Our
Intellectual Property and Third-Party Contracts
If
we are unable to adequately protect our intellectual property, third parties may
be able to use our intellectual property, which could adversely affect our
ability to compete in the market.
Our
commercial success will depend in part on our ability and the ability of our
licensors to obtain and maintain patent protection on our drug products and
technologies and successfully defend these patents against third-party
challenges. The patent positions of pharmaceutical and biotechnology companies
can be highly uncertain and involve complex legal and factual questions. No
consistent policy regarding the breadth of claims allowed in biotechnology
patents has emerged to date. Accordingly, the patents we use may not be
sufficiently broad to prevent others from practicing our technologies or from
developing competing products. Furthermore, others may independently develop
similar or alternative drug products or technologies or design around our
patented drug products and technologies. The patents we use may be challenged or
invalidated or may fail to provide us with any competitive
advantage.
We rely
on trade secrets to protect our intellectual property where we believe patent
protection is not appropriate or obtainable. Trade secrets are difficult to
protect. While we require our employees, collaborators and consultants to enter
into confidentiality agreements, this may not be sufficient to adequately
protect our trade secrets or other proprietary information. In addition, we
share ownership and publication rights to data relating to some of our drug
products and technologies with our research collaborators and scientific
advisors. If we cannot maintain the confidentiality of this information, our
ability to receive patent protection or protect our trade secrets or other
proprietary information will be at risk.
The
intellectual property that we own or have licensed relating to our product
candidates are limited, which could adversely affect our ability to compete in
the market and adversely affect the value of our product
candidates.
The
patent rights that we own or have licensed relating to our product candidates
are limited in ways that may affect our ability to exclude third parties from
competing against us if we obtain regulatory approval to market these product
candidates. In particular:
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Our
composition of matter patent covering KRX-0401 (perifosine) expires in
2013 and we cannot assure you that we can obtain an extension to 2018. We
do not hold a composition of matter patent covering Zerenex. Composition
of matter patents can provide protection for pharmaceutical products to
the extent that the specifically covered compositions are important. Upon
expiration of our composition of matter patent for KRX-0401, or for
Zerenex, where we do not have a composition of matter patent, competitors
who obtain the requisite regulatory approval can offer products with the
same composition as our products so long as the competitors do not
infringe any method of use patents that we may
hold.
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For
our product candidates, the principal patent protection that covers or
those we expect will cover, our product candidate is a method of use
patent. This type of patent only protects the product when used or sold
for the specified method. However, this type of patent does not limit a
competitor from making and marketing a product that is identical to our
product that is labeled for an indication that is outside of the patented
method, or for which there is a substantial use in commerce outside the
patented method.
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Moreover,
physicians may prescribe such a competitive identical product for indications
other than the one for which the product has been approved, or off-label
indications, that are covered by the applicable patents. Although such off-label
prescriptions may infringe or induce infringement of method of use patents, the
practice is common and such infringement is difficult to prevent or
prosecute.
In
addition, the limited patent protection described above may adversely affect the
value of our product candidates and may inhibit our ability to obtain a
corporate partner at terms acceptable to us, if at all.
Litigation
or third-party claims could require us to spend substantial time and money
defending such claims and adversely affect our ability to develop and
commercialize our products.
We may be
forced to initiate litigation to enforce our contractual and intellectual
property rights, or we may be sued by third parties asserting claims based on
contract, tort or intellectual property infringement. In addition, third parties
may have or may obtain patents in the future and claim that our drug products or
technologies infringe their patents. If we are required to defend against suits
brought by third parties, or if we sue third parties to protect our rights, we
may be required to pay substantial litigation costs, and our management's
attention may be diverted from operating our business. In addition, any legal
action against our licensors or us that seeks damages or an injunction of our
commercial activities relating to our drug products or technologies could
subject us to monetary liability and require our licensors or us to obtain a
license to continue to use our drug products or technologies. We cannot predict
whether our licensors or we would prevail in any of these types of actions or
that any required license would be made available on commercially acceptable
terms, if at all.
Risks Related to Our Common
Stock
Future
sales or other issuances of our common stock could depress the market for our
common stock.
Sales of
a substantial number of shares of our common stock, or the perception by the
market that those sales could occur, could cause the market price of our common
stock to decline or could make it more difficult for us to raise funds through
the sale of equity in the future.
If we
make one or more significant acquisitions in which the consideration includes
stock or other securities, our stockholders’ holdings may be significantly
diluted. In addition, we may enter into arrangements with third parties
permitting us to issue shares of common stock in lieu of certain cash payments
upon the achievement of milestones.
In
addition, we may be required to issue up to 3,372,422 shares of our common stock
to former stockholders of ACCESS Oncology upon the achievement of certain
milestones, of which 500,000 shares may be payable in the next 12 months if we
reach the first milestone, or we may conclude, under certain circumstances, that
it is in our best interest to settle this contingent share obligation for all or
substantially all of such shares in advance of reaching any milestones. A
substantial portion of the contingent shares would be payable to related
parties.
Our
stock price can be volatile, which increases the risk of litigation, and may
result in a significant decline in the value of your investment.
The
trading price of our common stock is likely to be highly volatile and subject to
wide fluctuations in price in response to various factors, many of which are
beyond our control. These factors include:
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developments
concerning our drug candidates;
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announcements
of technological innovations by us or our
competitors;
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introductions
or announcements of new products by us or our
competitors;
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announcements
by us of significant acquisitions, strategic partnerships, joint ventures
or capital commitments;
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changes
in financial estimates by securities
analysts;
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actual
or anticipated variations in quarterly operating results and
liquidity;
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expiration
or termination of licenses, research contracts or other collaboration
agreements;
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conditions
or trends in the regulatory climate and the biotechnology and
pharmaceutical industries;
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changes
in the market valuations of similar companies;
and
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additions
or departures of key personnel.
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In
addition, equity markets in general, and the market for biotechnology and life
sciences companies in particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of companies traded in those markets. These broad market and
industry factors may materially affect the market price of our common stock,
regardless of our development and operating performance. In the past, following
periods of volatility in the market price of a company's securities, securities
class-action litigation has often been instituted against that company. Such
litigation, if instituted against us, could cause us to incur substantial costs
to defend such claims and divert management's attention and resources, which
could seriously harm our business.
Certain
anti-takeover provisions in our charter documents and Delaware law could make a
third-party acquisition of us difficult. This could limit the price investors
might be willing to pay in the future for our common stock.
Provisions
in our amended and restated certificate of incorporation and bylaws could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, or control us. These
factors could limit the price that certain investors might be willing to pay in
the future for shares of our common stock. Our amended and restated certificate
of incorporation allows us to issue preferred stock with the approval of our
stockholders. The issuance of preferred stock could decrease the amount of
earnings and assets available for distribution to the holders of our common
stock or could adversely affect the rights and powers, including voting rights,
of such holders. In certain circumstances, such issuance could have the effect
of decreasing the market price of our common stock. Our amended and restated
bylaws eliminate the right of stockholders to call a special meeting of
stockholders, which could make it more difficult for stockholders to effect
certain corporate actions. Any of these provisions could also have the effect of
delaying or preventing a change in control.
We
are currently not in compliance with NASDAQ rules for continued listing on the
NASDAQ Capital Market and are at risk of being delisted, which may subject us to
the SEC’s penny stock rules and decrease the liquidity of our common
stock.
On April
22, 2008, we received notice from The NASDAQ Stock Market that we were not in
compliance with the $1.00 minimum bid price requirement for continued inclusion
on the applicable NASDAQ market. This notification is a standard communication
when the bid price of a NASDAQ-listed company closes below the minimum $1.00 per
share requirement for 30 consecutive business days. In accordance with NASDAQ
rules, we were provided 180 calendar days to regain compliance by having the bid
price of our common stock close at $1.00 per share or more for a minimum of 10
consecutive business days. On October 21, 2008, we received notice from The
NASDAQ Stock Market that the bid price and market value of publicly traded
securities requirements for continued listing on a NASDAQ market had been
temporarily suspended. Due to this action, we believe that we have until July
20, 2009, to achieve compliance with the $1.00 minimum closing bid price
requirement.
On
November 17, 2008, we received notice from The NASDAQ Stock Market that we were
no longer in compliance with Marketplace Rule 4310(c)(3), which requires us to
have a minimum of $2,500,000 in stockholders' equity, or $35,000,000 market
value of listed securities, or $500,000 of net income from continuing operations
for the most recently completed fiscal year or two of the three most recently
completed fiscal years, for continued listing on the NASDAQ Capital Market. On
December 2, 2008, we submitted to The NASDAQ Stock Market a plan to achieve and
sustain compliance with all of the NASDAQ Capital Market listing
requirements.
On March
3, 2009, we received notice from The NASDAQ Stock Market indicating that we had
failed to regain compliance with NASDAQ Marketplace Rule 4310(c)(3). Therefore,
The NASDAQ Stock Market determined to delist our common stock from the NASDAQ
Capital Market unless we appealed the delisting determination to a hearing. On
March 9, 2009, we requested a hearing to appeal the determination of The NASDAQ
Stock Market to delist our common stock to a NASDAQ Listings Qualification Panel
(“Panel”), which automatically stayed the delisting of our common stock pending
issuance of the Panel's decision. The hearing is scheduled for April 30, 2009.
At the Panel hearing, we plan to ask the Panel to provide us with additional
time to regain compliance with NASDAQ Marketplace Rule
4310(c)(3). There can be no assurance that such a request will be
granted or that the Panel will permit us to continue to list our common stock on
the NASDAQ Capital Market, or that in the future we will meet the listing
requirements of the NASDAQ Capital Market, including, without limitation, bid
price, stockholders’ equity and/or market value of listed securities minimum
requirements. Additionally, our efforts to continue to meet the listing
requirements may be limited by current market conditions, including volatility
in the market.
If we are
delisted from the NASDAQ Capital Market, our common stock may be traded
over-the-counter on the OTC Bulletin Board or in the “pink sheets.” These
alternative markets, however, are generally considered to be less efficient than
the NASDAQ Capital Market. Many over-the-counter stocks trade less frequently
and in smaller volumes than securities traded on the NASDAQ markets, which would
likely have a material adverse effect on the liquidity of our common
stock.
If our
common stock is delisted from the NASDAQ Capital Market, there may be a limited
market for our stock, trading in our stock may become more difficult and our
share price could decrease even further. In addition, if our common stock is
delisted, our ability to raise additional capital may be
impaired.
In
addition, our common stock may become subject to penny stock rules. The SEC
generally defines “penny stock” as an equity security that has a market price of
less than $5.00 per share, subject to certain exceptions. We are not currently
subject to the penny stock rules because our common stock qualifies for an
exception to the SEC’s penny stock rules for companies that have an equity
security that is quoted on The NASDAQ Stock Market. However, if we were
delisted, our common stock would become subject to the penny stock rules, which
impose additional sales practice requirements on broker-dealers who sell our
common stock. If our common stock were considered penny stock, the ability of
broker-dealers to sell our common stock and the ability of our stockholders to
sell their shares in the secondary market would be limited and, as a result, the
market liquidity for our common stock would be adversely affected. We cannot
assure you that trading in our securities will not be subject to these or other
regulations in the future.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES.
Our
corporate and executive office is located in New York, New York. Our New York
facility consists of approximately 11,700 square feet of leased space at 750
Lexington Avenue, New York, New York 10022. We have entered into an office
sharing agreement with a third-party for a portion of our leased space with an
initial term through April 2009 and, thereafter, on a month-to-month
basis.
ITEM
3. LEGAL PROCEEDINGS.
We, and
our subsidiaries, are not a party to, and our property is not the subject of,
any material pending legal proceedings, other than as noted below.
In July
2003, Keryx (Israel) Ltd., one of our Israeli subsidiaries, vacated its
Jerusalem facility, after giving advance notice to RMPA Properties Ltd., the
landlord. On May 1, 2005, the landlord filed suit in the Circuit Court of
Jerusalem in Jerusalem, Israel, claiming that Keryx (Israel) Ltd., among other
parties, was liable as a result of the alleged breach of the lease agreement. On
March 3, 2009, we entered into a settlement agreement with R.M.P.A. Properties
Ltd., with respect to the dispute. In accordance with the settlement agreement,
in March 2009, we paid the landlord a total sum of $260,000 for a full release
of all claims and obligations under the lease agreement.
We
prevailed in an arbitration proceeding with Alfa Wasserman concerning certain
terms of the 1998 License Agreement between Alfa Wasserman and the Company
related to the provision of data to Alfa Wasserman and consultation regarding
management of the licensed patents. An arbitration hearing was held in October
2007 and the arbitrator issued his decision on March 25, 2008, rejecting Alfa
Wasserman’s claims that we were in material breach of the License Agreement. The
arbitrator determined that each party would bear its own costs for the
arbitration.
In April
2008, we notified Alfa Wasserman of our intention to terminate the License
Agreement. We offered to transfer to Alfa Wasserman all regulatory applications
as provided in the License Agreement and demanded payment by Alfa Wasserman of
25% of our development costs associated with sulodexide, as provided in the
License Agreement. Alfa Wasserman itself served a notice of termination of the
License Agreement on the alleged grounds that we are in material breach of the
agreement for failing to diligently develop sulodexide by terminating the Phase
4 clinical trial. By seeking to terminate the License Agreement, Alfa Wasserman
is thereby seeking to avoid reimbursing us our development costs. We intend to
submit our claim for development costs and Alfa Wasserman’s claim of material
breach to arbitration for resolution.
In April
2008, we commenced an action in the U.S. District Court for the Southern
District of New York against Panion & BF Biotech, Inc. (“Panion”) for
breaching the manufacturing provisions of the March 14, 2008 Amended and
Restated License Agreement between the Company and Panion, and the implied
covenant of good faith and fair dealing contained therein. We sought declaratory
and injunctive relief and damages against Panion. Panion asserted counterclaims
against us for alleged breach of the agreement and the implied covenant of good
faith and fair dealing contained therein and for alleged breach of fiduciary
duties, and sought declaratory and injunctive relief and damages in the amount
of “at least one million dollars.” We replied, denying Panion’s counterclaims.
In November 2008, the parties agreed to settle their dispute. The parties
entered into a first amendment to the Amended and Restated License Agreement by
which Panion granted us additional manufacturing and development rights, and we
paid Panion $200,000 in November 2008. Following execution of the settlement
agreement and first amendment to the Amended and Restated License Agreement, the
parties entered a voluntary dismissal of the action, including Panion’s asserted
counterclaims.
We
in-licensed KRX-0501 from Krenitsky Pharmaceuticals, Inc. (“Krenitsky”) in 2005.
In October 2008, Krenitsky commenced an action in the United States District
Court, Middle District of North Carolina, Durham Division, against the Company,
requesting a declaratory judgment from the court determining that (i) we
breached the 2005 License Agreement between Krenitsky and the Company, (ii)
Krenitsky was within its legal rights to terminate the License Agreement for
cause, (iii) we have no further rights or interests in the licensed patents, and
(iv) Krenitsky has no further obligations to us under the License Agreement. In
December 2008, the parties agreed to settle their dispute and as a result have
entered into a License Termination, Technology Transfer and Settlement
Agreement, whereby the license agreement was terminated and certain know-how was
transferred to Krenitsky in exchange for a portion of any future license and
milestone payments received by Krenitsky related to KRX-0501 and a royalty on
sales of the drug, if any. Following execution of the Termination, Technology
Transfer and Settlement Agreement, the parties entered a voluntary dismissal of
the action.
We are
presently engaged in an arbitration proceeding with ICON Central Laboratories
(“ICON”), the central laboratory we used for the clinical development of
Sulonex, concerning certain fees related mainly to the provision of storage
services pursuant to a series of service agreements. In March 2008, we
terminated the agreements. ICON is claiming that the we owe it
$816,647 in unpaid invoices, much of which is made up of charges for annual
storage fees. It is our position that we should not have to pay for storage fees
incurred after the effective date of the termination of the agreements, and we
intend to vigorously defend this proceeding on this basis, and to assert a
counterclaim for a refund of the unused portions of the annual storage fees
already paid to ICON.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We did
not submit any matters to a vote of our security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of
2008.
Notes
to the Consolidated Financial Statements
NOTE
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION
OF BUSINESS
Keryx
Biopharmaceuticals, Inc. and subsidiaries (“Keryx” or the “Company”) is a
biopharmaceutical company focused on the acquisition, development and
commercialization of medically important, novel pharmaceutical products for the
treatment of life-threatening diseases, including renal disease and cancer. The
Company owns a 100% interest in each of ACCESS Oncology, Inc., Neryx
Biopharmaceuticals, Inc., and Accumin Diagnostics, Inc., all U.S. corporations
incorporated in the State of Delaware, and Keryx (Israel) Ltd. and Keryx
Biomedical Technologies Ltd., each organized in Israel. In 2003, the Company’s
subsidiaries in Israel ceased operations and are currently in the process of
being closed down. Most of the Company's biopharmaceutical development and
substantially all of its administrative operations during 2008, 2007 and 2006
were conducted in the United States of America.
The
Company was in the development stage at December 31, 2007. During the year ended
December 31, 2008, the Company completed its development activities and
commenced its planned principal operations.
LIQUIDITY
The
Company has incurred substantial operating losses since its inception and
expects to continue to incur operating losses for the foreseeable future and may
never become profitable. As of December 31, 2008, the Company has an accumulated
deficit of $331.9 million and a deficiency in equity of $1.5 million. The
Company is dependent upon significant financing to provide the working capital
necessary to execute its business plan. The Company has not yet commercialized
any of its drug candidates and cannot be sure if it will ever be able to do so.
Even if the Company commercializes one or more of its drug candidates, the
Company may not become profitable. The Company’s ability to achieve
profitability depends on a number of factors, including its ability to obtain
regulatory approval for its drug candidates, successfully complete any
post-approval regulatory obligations and successfully commercialize its drug
candidates alone or in partnership. The Company may continue to incur
substantial operating losses even if it begins to generate revenues from its
drug candidates, if approved. The Company currently anticipates that its cash,
cash equivalents and investment securities as of December 31, 2008, exclusive of
its holdings in auction rate securities and inclusive of a $3 million milestone
payment received by the Company in March 2009 under its sublicense agreement for
Zerenex in Japan, are sufficient to meet the Company’s anticipated working
capital needs and fund its business plan through the end of 2009. However, if
the Company is not able to receive proceeds from some portion of its auction
rate securities by the first quarter of 2010, the Company may not have the
ability to continue as a going concern for any significant period beyond that
point. The actual amount of funds that the Company will need to operate is
subject to many factors, including the timing, design and conduct of clinical
trials for the Company’s drug candidates. The Company is evaluating market
conditions to determine the appropriate timing and extent to which it will seek
to obtain additional debt, equity or other type of financing. If the Company
determines that it is necessary to seek additional funding, there can be no
assurance that it will be able to obtain any such funding on terms that are
acceptable to the Company, if at all.
The
accompanying financial statements have been prepared assuming that the Company
continues as a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The factors
discussed above, taken together with the Company’s limited cash, cash
equivalents, and short-term investment securities, and illiquid investments in
auction rate securities raise substantial doubt about the Company’s ability to
continue as a going concern. The financial statements do not include any
adjustments that might be necessary should the Company be unable to continue as
a going concern.
The
Company’s common stock is listed on the NASDAQ Capital Market
and
trades under the symbol “KERX.” On April 22, 2008, the Company received notice
from The NASDAQ Stock Market that it was not in compliance with the $1.00
minimum bid price requirement for continued inclusion on the applicable NASDAQ
market. On October 21, 2008, the Company received notice from The NASDAQ Stock
Market that the bid price and market value of publicly traded securities
requirements for continued listing on a NASDAQ market had been temporarily
suspended. Due to this action, the Company believes that it has until July 20,
2009, to achieve compliance with the $1.00 minimum closing bid price
requirement.
On
November 17, 2008, the Company received notice from The NASDAQ Stock Market that
it was no longer in compliance with Marketplace Rule 4310(c)(3), which requires
the Company to have a minimum of $2,500,000 in stockholders' equity, or
$35,000,000 market value of listed securities, or $500,000 of net income from
continuing operations for the most recently completed fiscal year or two of the
three most recently completed fiscal years, for continued listing on the NASDAQ
Capital Market. On December 2, 2008, the Company submitted to The NASDAQ Stock
Market a plan to achieve and sustain compliance with all of the NASDAQ Capital
Market listing requirements.
On March
3, 2009, the Company received notice from The NASDAQ Stock Market indicating
that it had failed to regain compliance with NASDAQ Marketplace Rule 4310(c)(3).
Therefore, The NASDAQ Stock Market determined to delist the Company’s common
stock from the NASDAQ Capital Market unless the Company appealed the delisting
determination to a hearing. On March 9, 2009, the Company requested a hearing to
appeal the determination of The NASDAQ Stock Market to delist the Company’s
common stock to a NASDAQ Listings Qualification Panel (“Panel”), which
automatically stayed the delisting of the Company’s common stock pending
issuance of the Panel's decision. The hearing is scheduled for April 30, 2009.
At the Panel hearing, the Company plans to ask the Panel to provide it with
additional time to regain compliance with NASDAQ Marketplace Rule
4310(c)(3). There can be no assurance that such a request will be
granted or that the Panel will permit the Company to continue to list its common
stock on the NASDAQ Capital Market, or that in the future the Company will meet
the listing requirements of the NASDAQ Capital Market, including, without
limitation, bid price, stockholders’ equity and/or market value of listed
securities minimum requirements. Additionally, the Company’s efforts to continue
to meet the listing requirements may be limited by current market conditions,
including volatility in the market. If the Company’s common stock is delisted
from the NASDAQ Capital Market, there may be a limited market for the Company’s
stock, trading in the Company’s stock may become more difficult and the
Company’s share price could decrease even further. In addition, if the Company’s
common stock is delisted, the Company’s ability to raise additional capital may
be impaired.
PRINCIPLES
OF CONSOLIDATION
The
consolidated financial statements include the financial statements of the
Company and its wholly owned subsidiaries. Intercompany transactions and
balances have been eliminated in consolidation.
CORRECTION
OF IMMATERIAL ERROR
The
Company had previously disclosed in its consolidated financial statements as of,
and for the quarter and six months ended, June 30, 2006, differences that were
identified during fiscal 2006 in connection with the Company’s internal review
of its historical stock option practices, including the underlying option grant
documentation and procedures, which resulted in the determination of additional
compensation expense based on revised measurement dates. At that time, the
Company determined that the additional compensation expense resulting from
revised measurement dates was immaterial for each period and as a result was not
recorded. The Company has continued to assess the impact of this adjustment
under the provisions of SEC Staff Accounting Bulletin Nos. 99 and 108 and
concluded it would continue to be immaterial in subsequent periods. Due to the
Company’s decision to cease development of Sulonex and the related
restructurings implemented during 2008, the Company believes this additional
compensation expense may become material in future periods. As a result, the
Company has recorded an adjustment to increase its accumulated deficit and
additional paid-in capital as of January 1, 2006 by $763,000 to account for the
recognition of these additional stock-based compensation costs incurred prior to
January 1, 2006. The adjustment recorded as of January 1, 2006 has no effect on
the total amount of the Company’s stockholders’ (deficiency) equity balances in
the consolidated financial statements as of, and for years ended December 31,
2006, 2007 and 2008, and there will be no impact on any future
period.
USE
OF ESTIMATES
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles (“GAAP”) requires management to make estimates and
judgments that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
applicable reporting period. Actual results could differ from those estimates.
Such differences could be material to the financial statements.
CASH
EQUIVALENTS
The
Company treats liquid investments with original maturities of less than three
months when purchased as cash equivalents.
INVESTMENT
SECURITIES
Investment
securities at December 31, 2008 and 2007 consist of short-term and long-term
government and auction rate securities. The Company classifies its short-term
and long-term debt securities as held-to-maturity, with the exception of auction
rate securities, which are classified as available-for-sale. Held-to-maturity
securities are those securities in which the Company has the ability and intent
to hold the security until maturity. Held-to-maturity securities are recorded at
amortized cost, adjusted for the amortization or accretion of premiums or
discounts. Premiums and discounts are amortized or accreted over the life of the
related held-to-maturity security as an adjustment to yield using the effective
interest method. Available-for-sale investment securities (which are comprised
of auction rate securities) are recorded at fair value. Changes in fair value
are recorded in accumulated other comprehensive income unless realized on sale
or recognized as an other-than-temporary impairment. See Note 4 – Fair Value
Measurements.
A decline
in the market value of any investment security below cost, that is deemed to be
other than temporary, results in a reduction in the carrying amount to fair
value. The impairment is charged to operations and a new cost basis for the
security is established. Other-than-temporary impairment charges are included in
interest and other (expense) income, net. Dividend and interest income are
recognized when earned.
PROPERTY,
PLANT AND EQUIPMENT
Property,
plant and equipment are stated at historical cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
assets:
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Estimated
useful life
(years)
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Lab
equipment
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4
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Office
furniture and equipment
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3-7
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Computers,
software and related equipment
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3
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Leasehold
improvements are amortized over the shorter of their useful life or the
remaining term of the lease exclusive of renewal options.
PATENT
COSTS
The Company expenses
patent maintenance costs as incurred.
Through March 31, 2006, the Company
classified its patent expenses in other research and
development. Effective April 1, 2006, the Company has classified its
patent expenses in other selling, general and administrative. The
results of prior periods have not been reclassified because they were not
significant.
REVENUE
RECOGNITION
The
Company recognizes license revenue consistent with the provisions of Staff
Accounting Bulletin (“SAB”) No. 104 and Emerging Issues Task Force (“EITF”)
Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” The
Company analyzes each element of its licensing agreement to determine the
appropriate revenue recognition. The Company recognizes revenue on upfront
payments and milestone payments over the period of significant involvement under
the related agreements unless the fee is in exchange for products delivered or
services rendered that represent the culmination of a separate earnings process
and no further performance obligation exists under the contract. The Company may
recognize milestone payments in revenue upon the achievement of specified
milestones if (1) the milestone is substantive in nature, and the
achievement of the milestone was not reasonably assured at the inception of the
agreement and (2) the fees are nonrefundable. Any milestone payments
received prior to satisfying these revenue recognition criteria are recognized
as deferred revenue. Sales milestones and royalties that are deferred will be
recognized when earned under the agreements.
Service
revenue consists of clinical trial management and site recruitment services.
Revenues generated from providing clinical trial management and site recruitment
services are recognized at the time such services are provided. Deferred revenue
is incurred when the Company receives a deposit or prepayment for services to be
performed at a later date.
Other
revenue consists of a payment in 2007 associated with a termination agreement,
which was recognized when earned
. (See Note
9).
COST
OF SERVICES
Cost of
services consist of all costs specifically associated with client programs such
as salary, benefits paid to personnel, payments to third-party vendors and
systems and other support facilities associated with delivering services to the
Company's clients. Cost of services are recognized at the time such services are
performed.
RESEARCH
AND DEVELOPMENT COSTS
Research and development
costs are expensed as incurred. The Company
makes estimates of costs
incurred in relation to external clinical research organizations, or CROs, and
clinical site costs. The Company analyzes the progress of clinical trials,
including levels of patient enrollment, invoices received and contracted costs
when evaluating the adequacy of the amount expensed and the related prepaid
asset and accrued liability. Additionally, administrative costs related to
external CROs are recognized on a straight-line basis over the estimated
contractual period. With respect to clinical site costs, the financial terms of
these agreements are subject to negotiation and vary from contract to contract.
Payments under these contracts may be uneven, and depend on factors such as the
achievement of certain events, the successful accrual of patients, the
completion of portions of the clinical trial or similar conditions. The
objective of the Company’s policy is to match the recording of expenses in its
financial statements to the actual services received and efforts expended. As
such, expense accruals related to clinical site costs are recognized based on
the Company’s estimate of the degree of completion of the event or events
specified in the specific clinical study or trial contract.
Effective
January 1, 2008, the Company adopted EITF No. 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for Use in Future
Research and Development Activities” (“EITF 07-3”). EITF 07-3 requires that
nonrefundable advance payments for goods or services that will be used or
rendered for future research and development activities be deferred and
amortized over the period that the goods are delivered or the related services
are performed, subject to an assessment of recoverability. The adoption of EITF
07-3 did not have an effect on the Company’s results of operations and financial
position as no nonrefundable advance payments were made during
2008.
INCOME
TAXES
Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to temporary and permanent differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in operations in the period
that includes the enactment date. If the likelihood of realizing the deferred
tax assets or liability is less than “more likely than not,” a valuation
allowance is then created.
On
January 1, 2007, the Company adopted Financial Accounting Standards Board
(“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”). FIN 48 clarifies the criteria for recognizing tax benefits
related to uncertain tax positions under Statement of Financial Accounting
Standards (“SFAS”) No. 109, “Accounting for Income Taxes” (“SFAS No. 109”), and
requires additional financial statement disclosure. FIN 48 requires that the
Company recognize, in its consolidated financial statements, the impact of a tax
position if that position is more likely than not to be sustained upon
examination, based on the technical merits of the position. Adoption of FIN 48
had no impact on the Company’s consolidated results of operations and financial
position. Upon adoption, the Company believed there were no uncertain tax
positions that failed to meet the more likely than not recognition threshold
under FIN 48 to be sustained upon examination.
Prior to
the adoption of FIN 48, the Company included interest accrued on the
underpayment of income taxes, if any, in selling, general and administrative
expense. The Company continued to follow this policy following the
adoption of FIN 48.
The
Company and its subsidiaries file income tax returns in the U.S. federal
jurisdiction and in various states. The Company has tax net operating
loss carryforwards that are subject to examination for a number of years beyond
the year in which they may be utilized for tax purposes. Since a portion of
these net operating loss carryforwards may be utilized in the future, many of
these net operating loss carryforwards will remain subject to
examination.
STOCK
- BASED COMPENSATION
In
December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment”
(“SFAS No. 123R”). SFAS No. 123R requires all share-based payments to employees,
and to non-employee directors as compensation for service on the Board of
Directors, to be recognized as compensation expense in the consolidated
financial statements based on the fair values of such payments.
The
Company adopted SFAS No. 123R on January 1, 2006 using the modified prospective
transition method. Under this method, compensation cost recognized beginning
January 1, 2006 includes: a) compensation cost for all share-based payments
granted prior to, but not yet vested as of January 1, 2006, based on the
grant-date fair value estimated in accordance with the original provisions of
SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”),
and b) compensation cost for all share-based payments granted subsequent to
January 1, 2006, based on the grant-date fair value estimated in accordance
with the provisions of SFAS No. 123R. The results for prior periods have not
been restated.
Stock-based
compensation expense recognized each period is based on the value of the portion
of share-based payment awards that is ultimately expected to vest during the
period. SFAS No. 123R requires forfeitures to be estimated at the time of grant
and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates. In the Company’s pro forma disclosures required under SFAS
No. 123 for periods prior to 2006, the Company accounted for forfeitures as they
occurred. Upon adoption of SFAS No. 123R, the Company elected to use the
Black-Scholes model to value share-based payments granted to employees
subsequent to January 1, 2006 and elected to attribute the value of
stock-based compensation expense using the straight-line single option method.
These methods were previously used for the Company’s pro forma information
required under SFAS No. 123. For additional information, see Note 11 –
Stockholders' Equity.
The
Company accounts for equity instruments issued to third party service providers
(non-employees) in accordance with the fair value method prescribed by the
provisions of EITF Issue No. 96-18, “Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling
Goods or Services” (“EITF 96-18”). Unvested options are revalued at every
reporting period and amortized over the vesting period in order to determine the
compensation expense.
NET
LOSS PER SHARE
Basic net
loss per share is computed by dividing the losses allocable to common
stockholders by the weighted average number of shares of common stock
outstanding for the period.
Shares of restricted stock
are included in common stock outstanding unless forfeited.
Diluted net
loss per share does not reflect the effect of shares of common stock to be
issued upon the exercise of stock options and warrants, as their inclusion would
be anti-dilutive.
The options and warrants
outstanding as of December 31, 2008, 2007 and 2006, which are not included in
the computation of net loss per share amounts, were 9,187,023, 11,191,149 and,
11,106,689, respectively.
COMPREHENSIVE
LOSS
Comprehensive
loss is the same as net loss for all years presented.
BUSINESS
ACQUISITIONS
The
Company accounts for acquired businesses using the purchase method of accounting
which requires that the assets acquired and liabilities assumed be recorded at
the date of acquisition at their respective fair values. The Company’s
consolidated financial statements and results of operations reflect an acquired
business after the completion of the acquisition and are not retroactively
restated. The cost to acquire a business, including transaction costs, is
allocated to the underlying net assets of the acquired business in proportion to
their respective fair values. Any excess of the purchase price over the
estimated fair values of the net assets acquired is recorded as goodwill. Any
excess of the net assets acquired over the purchase price represents negative
goodwill.
The
acquisition of ACCESS Oncology in February 2004 (see Note 10 – Contingent Equity
Rights) resulted in negative goodwill. Since the negative goodwill was a result
of not recognizing contingent consideration (i.e., the contingent equity
rights), the lesser of the negative goodwill and the maximum value of the
contingent equity rights at the date of the acquisition was recorded as if it
were a liability, thereby eliminating the negative goodwill.
IMPAIRMENT
The
Company accounts for impairment of long-lived assets using the provisions of
SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”
(“SFAS No. 144”). This statement requires the recognition of an impairment loss
when circumstances indicate that the carrying value of long-lived tangible and
intangible assets with finite lives may not be recoverable. Management’s policy
in determining whether an impairment indicator exists, a triggering event,
comprises measurable operating performance criteria as well as qualitative
measures. If an analysis is necessitated by the occurrence of a triggering
event, the Company makes certain assumptions in determining the impairment
amount. Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to future cash flows expected to be generated
by the asset or used in its disposal. If the carrying amount of an asset exceeds
its estimated future cash flows, an impairment charge is recognized. During the
first quarter of 2007, management reviewed both its original and projected
revenue estimates associated with the Accumin diagnostic tool. As a result of
this analysis, the Company concluded that the asset was impaired and recorded an
impairment charge of approximately $600,000 to write-down identifiable
intangible long-lived assets associated with Accumin. The charge was recorded in
loss from discontinued operations. As further discussed in Note 5, the
Company recorded an impairment charge of $11.0 million during the year ended
December 31, 2008 related to the write-down of fixed assets following the
cessation of its development of Sulonex.
The
Company accounts for impairment of goodwill using the provisions of SFAS No.
142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). This statement
addresses how intangible assets that are acquired individually or with a group
of other assets (but not those acquired in a business combination) should be
accounted for in financial statements upon their acquisition. SFAS No. 142 also
addresses how goodwill and other intangible assets should be accounted for after
they have been initially recognized in the financial statements. SFAS No. 142
requires goodwill be tested using a two-step process. The first step compares
the fair value of the reporting unit with the unit's carrying value, including
goodwill. When the carrying value of the reporting unit is greater than fair
value, the unit’s goodwill may be impaired, and the second step must be
completed to measure the amount of the goodwill impairment charge, if any. In
the second step, the implied fair value of the reporting unit’s goodwill is
compared with the carrying amount of the unit’s goodwill. If the carrying amount
is greater than the implied fair value, the carrying value of the goodwill must
be written down to its implied fair value. The negative outcome of the Company’s
pivotal SUN-MICRO Phase 3 clinical trial of Sulonex™ (sulodexide) for the
treatment of diabetic nephropathy, announced on March 7, 2008, and the Company’s
subsequent decision to terminate the ongoing SUN-MACRO Phase 4 clinical trial
triggered an impairment test. As of March 31, 2008, management concluded that
there was no impairment of the Company’s goodwill. Additionally, as of December
31, 2008, management conducted its annual assessment of goodwill and concluded
that there is no impairment to its goodwill. The Company will continue to
perform impairment tests under SFAS No. 142 annually, at December 31, and
whenever events or changes in circumstances suggest that the carrying value of
an asset may not be recoverable.
CONCENTRATIONS
OF CREDIT RISK
The
Company does not have significant off-balance-sheet risk or credit risk
concentrations. The Company maintains its cash and cash equivalents and
short-term and long-term held-to-maturity investments with multiple financial
institutions that invests in investment-grade securities with average maturities
of less than twelve months. The Company also maintains long-term investments in
auction rate securities. See Note 3 – Investment Securities and Note 4 – Fair
Value Measurements.
RECENTLY
ISSUED ACCOUNTING STANDARDS
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141R”), which replaces SFAS No. 141. SFAS No. 141R
changes the accounting for business combinations, including the measurement of
acquirer shares issued in consideration for a business combination, the
recognition of contingent consideration, the accounting for contingencies, the
recognition of acquired in-process research and development, the accounting for
acquisition-related restructuring cost accruals, the treatment of
acquisition-related transaction costs and the recognition of changes in the
acquirer’s income tax valuation allowance and income tax uncertainties. SFAS No.
141R applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008, and interim periods within those fiscal years.
Early application is prohibited.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB 51” (“SFAS No. 160”),
which changes the accounting and reporting for minority interests. Minority
interests will be recharacterized as noncontrolling interests and will be
reported as a component of equity separate from the parent’s equity, and
purchases or sales of equity interests that do not result in a change in control
will be accounted for as equity transactions. In addition, net income
attributable to the noncontrolling interest will be included in consolidated net
income (loss) on the face of the consolidated statement of operations and, upon
a loss of control, the interest sold, as well as any interest retained, will be
recorded at fair value with any gain or loss recognized in operations. SFAS No.
160 is effective for fiscal years (including interim periods within those fiscal
years) beginning on or after December 15, 2008. Earlier adoption is prohibited.
The statement shall be applied prospectively as of the beginning of the fiscal
year in which it is initially applied, except for the presentation and
disclosure requirement which shall be applied retrospectively for all periods
presented. The Company expects that the adoption of SFAS No. 160 will not have
an impact on its results of operations and financial position.
In
December 2007, the FASB ratified EITF Issue No. 07-1, “Accounting for
Collaborative Arrangements” (“EITF 07-1”). EITF 07-1 defines
collaborative arrangements and establishes reporting requirements for
transactions between participants in a collaborative arrangement and between
participants in the arrangement and third parties. EITF 07-1 also establishes
the appropriate income statement presentation and classification for joint
operating activities and payments between participants, as well as the
sufficiency of the disclosures related to these arrangements. EITF 07-1 is
effective for fiscal years beginning after December 15, 2008. EITF 07-1 shall be
applied using a modified version of retrospective transition for those
arrangements in place at the effective date. An entity should report the effects
of applying this Issue as a change in accounting principle through retrospective
application to all prior periods presented for all arrangements existing as of
the effective date, unless it is impracticable to apply the effects the change
retrospectively. The Company is currently assessing the impact that EITF 07-1
may have on its results of operations and financial position.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - including an amendment of FASB
Statement No. 115” (“SFAS 159”). SFAS 159 is expected to expand the use of fair
value accounting, but does not affect existing standards which require certain
assets or liabilities to be carried at fair value. The objective of SFAS 159 is
to improve financial reporting by providing companies with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. Under SFAS 159, a company may choose, at its initial application or
at other specified election dates, to measure eligible items at fair value and
report unrealized gains and losses on items for which the fair value option has
been elected in earnings at each subsequent reporting date. SFAS 159 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The Company
has not elected the fair value option for any of its existing assets and
liabilities and thus the adoption of SFAS 159 did not have an impact on its
results of operations and financial position.
In
February 2008, the FASB issued FASB Staff Position (“FSP”) 157-2, “Effective
Date of FASB Statement No. 157” (“FSP 157-2”), which delays the effective date
of SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”) for
non-financial assets and non-financial liabilities. The delay is intended to
allow the FASB and constituents additional time to consider the effect of
various implementation issues that have arisen, or that may arise, from the
application of SFAS No. 157. For items within the scope of FSP 157-2, this FSP
defers the effective date of SFAS No. 157 to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years. The Company
currently does not believe that the adoption of the deferred portion of SFAS No.
157 will have a material impact on the Company’s financial condition or results
of operations.
NOTE
2 – CASH AND CASH EQUIVALENTS
(in thousands)
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
Money
market funds
|
|
$
|
12,159
|
|
|
$
|
14,457
|
|
Checking
and bank deposits
|
|
|
984
|
|
|
|
4,608
|
|
Total
|
|
$
|
13,143
|
|
|
$
|
19,065
|
|
NOTE
3 - INVESTMENT SECURITIES
The
Company records its investments as either held-to-maturity or
available-for-sale. Held-to-maturity investments are recorded at amortized cost.
Available-for-sale investment securities (which are comprised of auction rate
securities) are recorded at fair value (see Note 4 – Fair Value Measurements).
Other-than-temporary impairment charges are included in interest and other
(expense) income, net. The following tables summarize the Company’s
investment securities at December 31, 2008 and December 31, 2007:
|
|
December 31, 2008
|
|
(in thousands)
|
|
Amortized cost,
as adjusted
|
|
|
Gross
unrealized
holding gains
|
|
|
Gross
unrealized
holding losses
|
|
|
Estimated
fair value
|
|
Short-term
investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of domestic governmental agencies (mature May 2009)
(held-to-maturity)
|
|
$
|
2,299
|
|
|
$
|
39
|
|
|
$
|
—
|
|
|
$
|
2,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction
rate securities (mature between 2037 and 2047)
(available-for-sale)
|
|
$
|
7,185
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,185
|
|
|
|
December 31, 2007
|
|
(in thousands)
|
|
Amortized cost
|
|
|
Gross
unrealized
holding gains
|
|
|
Gross
unrealized
holding losses
|
|
|
Estimated
fair value
|
|
Short-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of domestic governmental agencies (mature between April and October 2008)
(held-to-maturity)
|
|
$
|
20,838
|
|
|
$
|
91
|
|
|
$
|
—
|
|
|
$
|
20,929
|
|
Auction
rate securities (available-for-sale) *
|
|
|
22,200
|
|
|
|
—
|
|
|
|
—
|
|
|
|
22,200
|
|
|
|
$
|
43,038
|
|
|
$
|
91
|
|
|
$
|
—
|
|
|
$
|
43,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of domestic governmental agencies (mature May 2009)
(held-to-maturity)
|
|
$
|
2,296
|
|
|
$
|
54
|
|
|
$
|
—
|
|
|
$
|
2,350
|
|
* Amortized
cost approximates fair value. Unrealized gains and losses are
immaterial.
NOTE
4 – FAIR VALUE MEASUREMENTS
As of
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements”
(“SFAS No. 157”) for its financial assets and liabilities carried at fair value
on a recurring basis in the financial statements only. SFAS No. 157 defines fair
value, establishes a fair value hierarchy for assets and liabilities measured at
fair value and requires expanded disclosures about fair value measurements. The
SFAS No. 157 hierarchy ranks the quality and reliability of inputs, or
assumptions, used in the determination of fair value and requires financial
assets and liabilities carried at fair value to be classified and disclosed in
one of the following three categories:
|
·
|
Level
1 – quoted prices in active markets for identical assets and
liabilities;
|
|
·
|
Level
2 – inputs other than Level 1 quoted prices that are directly or
indirectly observable; and
|
|
·
|
Level
3 – unobservable inputs that are not corroborated by market
data.
|
As of
December 31, 2008, $7.2 million of the Company’s investment securities were
auction rate securities and represent interests in student loan-backed
securities. The auction rate securities are recorded at their fair value and
classified as long-term investments. Auction rate securities are structured to
provide liquidity through a Dutch auction process that resets the applicable
interest rate at pre-determined calendar intervals, generally every 28 days.
This mechanism has historically allowed existing investors either to rollover
their holdings, whereby they would continue to own their respective securities,
or liquidate their holdings by selling such securities at par. This auction
process has historically provided a liquid market for these securities; however,
the uncertainties in the credit markets have affected all of the Company’s
holdings in auction rate securities. Since February 2008, the auctions for the
auction rate securities held by the Company have not had sufficient buyers to
cover investors’ sell orders, resulting in unsuccessful auctions. When an
auction is unsuccessful, the interest rate is re-set to a level pre-determined
by the loan documents and remains in effect until the next auction date, at
which time the process repeats. While all but one of these investments were
rated A or higher at December 31, 2008, the Company is uncertain as to when, or
if, the liquidity issues relating to these investments will improve. The Company
assessed the fair value of its auction rate securities portfolio. As a result of
this valuation process, as described below, the Company recorded impairment
charges totaling $3.2 million during the year ended December 31, 2008, for
other-than-temporary declines in the value of its auction rate securities. These
other-than-temporary impairment charges were included in interest and other
(expense) income, net. In addition, in the first quarter of 2008, the Company
reclassified the entire auction rate securities portfolio from short-term to
long-term investments due to the uncertainty of when the Company will be able to
sell these securities. In November 2008, the Company sold one of its auction
rate security investments in the secondary market. The security had a par value
of $2.0 million and an adjusted book value of $1.6 million. Proceeds
from the sale of this security were $1.7 million, representing a gain of $0.1
million over the adjusted book value. The estimated fair value of the Company’s
remaining auction rate securities is $7.2 million at December 31,
2008.
The
valuation methods used to estimate the auction rate securities’ fair value were
(1) a discounted cash flow model, where the expected cash flows of the auction
rate securities are discounted to the present using a yield that incorporates
compensation for illiquidity, and (2) a market comparables method, where the
auction rate securities are valued based on indications, from the secondary
market, of what discounts buyers demand when purchasing similar auction rate
securities. The valuation also included assessments of the underlying structure
of each security, expected cash flows, discount rates, credit ratings, workout
periods, and overall capital market liquidity. These assumptions, assessments
and the interpretations of relevant market data are subject to uncertainties,
are difficult to predict and require significant judgment. The use of different
assumptions, applying different judgment to inherently subjective matters and
changes in future market conditions could result in significantly different
estimates of fair value of the Company’s auction rate securities. In addition,
the estimated fair value of the auction rates securities may differ from the
values that would have been used had a ready market existed, and the differences
could be material to the consolidated financial statements.
The fair
value of the Company’s auction rate securities could change significantly based
on market conditions and continued uncertainties in the credit markets. If these
uncertainties continue or if these securities experience credit rating
downgrades, the Company may incur additional impairment charges with respect to
its auction rate securities portfolio. The Company continues to monitor the fair
value of its auction rate securities and relevant market conditions and will
recognize additional impairment charges if future circumstances warrant such
charges.
The
Company reviews investment securities for impairment in accordance with the
guidance in FSP SFAS 115-1 and 124-1, “The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments,” to determine the
classification of the impairment as temporary or other-than-temporary. Losses
are recognized in the Company’s consolidated statement of operations when a
decline in fair value is determined to be other-than-temporary. The Company
reviews its investments on an ongoing basis for indications of possible
impairment. Once identified, the determination of whether the impairment is
temporary or other-than-temporary requires significant judgment. The Company
believes that the impairment charges related to its auction rate securities
investments are other-than-temporary. The primary factors the Company
considers in classifying an impairment include the extent and time the fair
value of each investment has been below cost and the Company’s ability to hold
such investment to maturity.
The
following table provides the fair value measurements of applicable Company
financial assets according to the fair value levels defined by SFAS No. 157 as
of December 31, 2008:
|
|
Financial assets at fair value
as of December 31, 2008
|
|
(in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds (1)
|
|
$
|
12,159
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Obligations
of domestic governmental agencies (held-to-maturity) (2)
|
|
|
2,299
|
|
|
|
—
|
|
|
|
—
|
|
Auction
rate securities (3)
|
|
|
—
|
|
|
|
—
|
|
|
|
7,185
|
|
Total
|
|
$
|
14,458
|
|
|
$
|
—
|
|
|
$
|
7,185
|
|
(1)
|
Included
in cash and cash equivalents on the Company’s consolidated balance sheet.
The carrying amount of money market funds is a reasonable estimate of fair
value.
|
(2)
|
Amortized
cost approximates fair value.
|
(3)
|
Included
in long-term investment securities on the Company’s consolidated balance
sheet.
|
The
following table summarizes the change in carrying value associated with Level 3
financial assets for the twelve months ended December 31, 2008:
(in thousands)
|
|
Available-for-sale
long-term
investments
|
|
|
|
|
|
Balance
at January 1, 2008
|
|
$
|
—
|
|
|
|
|
|
|
Transfer
into Level 3 at original cost (1)
|
|
|
12,000
|
|
Sale
of security
|
|
|
(1,700
|
)
|
Realized
gain on sale of security
|
|
|
81
|
|
Total
impairment charges included in net loss
|
|
|
(3,196
|
)
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
$
|
7,185
|
|
(1)
|
Based
on deteriorated market conditions experienced in the first quarter of
2008, the Company changed the fair value measurement methodology of its
auction rate securities portfolio that the Company classifies as
available-for-sale from quoted prices in active markets to a model based
on discounted cash flows and market comparables. Accordingly, these
securities were re-classified from Level 1 to Level
3.
|
NOTE
5 - PROPERTY, PLANT AND EQUIPMENT
(in thousands)
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
Manufacturing
suite and equipment
|
|
$
|
—
|
|
|
$
|
11,224
|
|
Leasehold
improvements
|
|
|
20
|
|
|
|
36
|
|
Office
furniture and equipment
|
|
|
315
|
|
|
|
315
|
|
Computers,
software and related equipment
|
|
|
436
|
|
|
|
386
|
|
|
|
|
771
|
|
|
|
11,961
|
|
Accumulated
depreciation and amortization
|
|
|
(589
|
)
|
|
|
(478
|
)
|
Net
book value
|
|
$
|
182
|
|
|
$
|
11,483
|
|
The
Company spent approximately $11.3 million in capital expenditures building a
manufacturing suite for Sulonex. With the cessation of the Company’s development
of Sulonex in March 2008, the Company took an impairment charge of $11.0
million, which is included in other research and development expenses in year
ended December 31, 2008, to write the assets down to their fair value of
$300,000, the amount for which the assets were sold during year ended December
31, 2008. The sale of the assets offset a payable and, therefore, cash was not
received by the Company. In addition, the Company recognized a $2.1 million
expense, which is included in other research and development expenses in the
year ended December 31, 2008, for costs related to the required restoration of
the leased facility to its original condition. See Note 18 –
Restructuring.
Depreciation
expense for the years ended December 31, 2008, 2007 and 2006 was approximately
$111,000, $130,000 and $132,000, respectively. The following table
summarizes depreciation expense for the years ended December 31, 2008, 2007 and
2006.
|
|
For the year ended December 31
|
|
(in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense:
|
|
|
|
|
|
|
|
|
|
Cost
of services
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2
|
|
Research
and development
|
|
|
84
|
|
|
|
86
|
|
|
|
84
|
|
General
and administrative
|
|
|
27
|
|
|
|
44
|
|
|
|
46
|
|
Total
|
|
$
|
111
|
|
|
$
|
130
|
|
|
$
|
132
|
|
NOTE 6
–
GOODWILL
On April
6, 2006, Accumin Diagnostics, Inc. (“ADI”), a wholly-owned subsidiary of the
Company, completed the acquisition of Accumin
TM
, a
novel, patent protected, diagnostic for the direct measurement of total,
intact urinary albumin, from AusAm Biotechnologies, Inc. (“AusAm”). The purchase
price of Accumin was $3,996,000, which included the issuance of 245,024 shares
of the Company’s common stock, the assumption of certain liabilities of AusAm
equal to approximately $345,000 and transaction costs and cash settlement costs
of approximately $341,000.
Subsequent
to the closing, disputes arose between AusAm and Keryx relating to the
determination of the purchase consideration under the acquisition
agreement. On July 31, 2006, AusAm filed a motion purporting to seek to
enforce the terms of the acquisition agreement and alleging damages in the
amount of $818,145. The matter has been settled pursuant to a settlement
agreement approved by the Bankruptcy Court on April 10, 2007. In April 2007,
under the settlement, Keryx paid AusAm $110,075 in full settlement of all claims
made by AusAm in the action. Following completion of the settlement, 15,646
shares of the Company’s common stock, which were issued and outstanding and held
in escrow, were canceled.
The
Accumin transaction has been accounted for as a purchase by the Company. The
excess of the purchase price over the net assets acquired in the Accumin
transaction represented goodwill of approximately $3,208,000, which has been
allocated to the Company’s Products segment based on the proposed synergies
associated with Sulonex prior to its discontinuation of development by the
Company.
In
September 2008, the Company terminated its license agreement related to the
Accumin product and ceased all operations related to the Diagnostic segment. See
Note 8 – Discontinued Operations.
NOTE
7 - OTHER ASSETS
(in thousands)
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
Patents
and other intangible assets
|
|
$
|
352
|
|
|
$
|
352
|
|
Long-term
deposits
|
|
|
62
|
|
|
|
322
|
|
Deferred
registration fees
|
|
|
22
|
|
|
|
22
|
|
|
|
|
436
|
|
|
|
696
|
|
|
|
|
|
|
|
|
|
|
Accumulated
amortization
|
|
|
(352
|
)
|
|
|
(352
|
)
|
|
|
$
|
84
|
|
|
$
|
344
|
|
Amortization
expense for the years ended December 31, 2008, 2007 and 2006 was approximately
$0, $14,000 and $84,000, respectively. The Company does not expect to record
amortization expenses going forward, as all intangible assets are fully
amortized.
NOTE 8
–
DISCONTINUED OPERATIONS
In
September 2008, the Company terminated its license agreement related to the
Accumin product and ceased all operations related to the Diagnostic segment. The
results of the Company’s Diagnostic segment and the related financial position
have been reflected as discontinued operations in the consolidated financial
statements in accordance with SFAS No. 144 and EITF Issue No. 03-13,
“Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in
Determining Whether to Report Discontinued Operations” (“EITF Issue No. 03-13”).
The consolidated financial statements have been reclassified to conform to
discontinued operations presentation for all historical periods
presented.
Summarized
selected financial information for discontinued operations are as
follows:
(in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Diagnostic
revenue
|
|
$
|
—
|
|
|
$
|
66
|
|
|
$
|
103
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of diagnostics sold
|
|
|
—
|
|
|
|
38
|
|
|
|
140
|
|
Research
and development
|
|
|
4
|
|
|
|
6
|
|
|
|
388
|
|
Selling,
general and administrative
|
|
|
171
|
|
|
|
778
|
|
|
|
591
|
|
Total
operating expenses
|
|
|
175
|
|
|
|
822
|
|
|
|
1,119
|
|
Loss
from discontinued operations
|
|
$
|
(175
|
)
|
|
$
|
(756
|
)
|
|
$
|
(1,016
|
)
|
In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” the Company recognizes an impairment loss when circumstances
indicate that the carrying value of long-lived tangible and intangible assets
with finite lives may not be recoverable. Management reviews various
quantitative and qualitative factors in determining whether an impairment
indicator exists, a triggering event. If an analysis is necessitated by the
occurrence of a triggering event, the Company makes certain assumptions in
determining the impairment amount. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future cash
flows expected to be generated by the asset or used in its disposal. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized. During the first quarter of 2007, management
reviewed both its original and projected revenue estimates associated with the
Accumin diagnostic tool. As a result of the projected cash flows of the
diagnostic tool, the Company concluded that the intangible asset was impaired
and recorded an impairment charge of approximately $600,000 to write-down
identifiable intangible long-lived assets associated with Accumin. The charge
was included in selling, general and administrative expenses and reflected
within the Company’s discontinued operations.
The
assets and liabilities of discontinued operations are stated separately as of
December 31, 2008 and 2007 on the accompanying consolidated balance sheets. The
major assets and liabilities categories are as follows:
(in thousands)
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
Assets
|
|
|
|
|
|
|
Other
current assets
|
|
$
|
—
|
|
|
$
|
73
|
|
Property,
plant and equipment, net
|
|
|
—
|
|
|
|
14
|
|
Assets
of discontinued operations
|
|
$
|
—
|
|
|
$
|
87
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
120
|
|
|
$
|
163
|
|
Liabilities
of discontinued operations
|
|
$
|
120
|
|
|
$
|
163
|
|
NOTE
9 - LICENSE AGREEMENTS
In
September 2007, the Company entered into a Sublicense Agreement with Japan
Tobacco Inc. (“JT”) and Torii Pharmaceutical Co., Ltd. (“Torii”), JT's
pharmaceutical business subsidiary, under which JT and Torii obtained the
exclusive sublicense rights for the development and commercialization of ferric
citrate in Japan, which is being developed in the United States under the trade
name Zerenex. JT and Torii are responsible for the future development and
commercialization costs in Japan.
An
upfront payment of $12.0 million, which was received in October 2007, is being
recognized as license revenue on a straight-line basis over the life of the
agreement, which is through the expiration of the last-to-expire patent covered
by the agreement in 2023, and represents the estimated period over which the
Company will have certain ongoing responsibilities under the sublicense
agreement. The Company recorded license revenue of approximately $774,000 and
$204,000 for the years ended December 31, 2008 and 2007, respectively, and, at
December 31, 2008 and 2007, has deferred revenue of approximately $11.0 million
and $11.8 million, respectively, associated with this $12.0 million payment
(approximately $774,000 of which has been classified as a current liability at
December 31, 2008 and 2007).
An
additional milestone payment of $8.0 million, for the achievement of certain
milestones reached in March 2008, was received in April 2008, and is being
recognized as license revenue on a straight-line basis over the life of the
agreement (as discussed above). The Company recorded license revenue of
approximately $406,000 for the year ended December 31, 2008, and, at December
31, 2008, has deferred revenue of approximately $7.6 million (approximately
$533,000 of which has been classified as a current liability) associated with
this $8.0 million payment.
The
Company may receive up to an additional $80.0 million in payments upon the
achievement of pre-specified milestones. In addition, upon commercialization, JT
and Torii will make royalty payments to the Company on net sales of ferric
citrate in Japan.
In
October 2004, the Company entered into a termination agreement with Yissum
Research and Development Company of the Hebrew University of Jerusalem
(“Yissum”), whereby in consideration for the Company’s agreement to a
termination of certain license rights, Yissum agreed to pay the Company 33.3% of
any cash consideration received by Yissum relating to the terminated license
rights, up to $6.0 million. In December 2007, the Company recognized $726,600 of
other revenue, which was received net of $36,330 of
income tax
withheld,
related to this termination agreement. Payments from Yissum are
recognized as earned since the Company has no responsibilities under the
terminated license agreement or the termination agreement.
NOTE
10 – CONTINGENT EQUITY RIGHTS
On
February 5, 2004, the Company acquired ACCESS Oncology, a related party, for a
purchase price of approximately $19,502,000. The purchase price
included the Company’s assumption of certain liabilities of ACCESS Oncology
equal to approximately $8,723,000, the issuance of shares of the Company’s
common stock valued at approximately $6,325,000, contingent equity rights valued
at approximately $4,004,000 and transaction costs of approximately
$450,000.
At the
effective time of the merger, each share of ACCESS Oncology common stock,
including shares issuable upon the exercise of options exercised before March 1,
2004, and upon the exercise of outstanding warrants, was converted into the
right to share in the contingent equity rights pro rata with the other holders
of ACCESS Oncology common stock. Pursuant to the merger agreement, 623,145
shares of the Company’s common stock valued at approximately $6,325,000 have
been issued to the former preferred stockholders of ACCESS Oncology. An
additional 4,433 shares of the Company’s common stock are issuable to those
preferred stockholders of ACCESS Oncology who have yet to provide the necessary
documentation to receive shares of the Company’s common stock.
The
contingent equity rights will be paid upon the achievement of the following
milestones:
|
·
|
500,000
shares of the Company’s common stock upon enrollment of the first patient
in a Keryx-sponsored Phase 3 (or other pivotal) clinical trial for any of
the acquired ACCESS Oncology drug
candidates;
|
|
·
|
750,000
shares of the Company’s common stock upon the first new drug application
acceptance by the Food and Drug Administration, or FDA, for any of the
acquired ACCESS Oncology drug
candidates;
|
|
·
|
1,750,000
shares of the Company’s common stock upon the first FDA approval of any of
the acquired ACCESS Oncology drug candidates;
and
|
|
·
|
372,422
shares of the Company’s common stock following the first 12-month period
that sales of all of the acquired ACCESS Oncology drug candidates combined
exceeds $100 million.
|
To date,
none of the above milestones have been achieved. In no event will the Company
issue more than 4,000,000 shares of its common stock pursuant to the merger
agreement. These 4,000,000 shares include 627,578 shares issued or issuable to
date and any contingent shares as described above. Accordingly, the amount of
the Company’s common stock deliverable to the former ACCESS Oncology
stockholders as milestone consideration will be no more than 3,372,422 shares.
The former preferred stockholders of ACCESS Oncology do not have a share of the
milestone consideration. The Company’s stockholders approved the issuance of
shares of its common stock payable as contingent milestone consideration at the
2004 annual meeting of stockholders, which took place on June 10,
2004.
The
ACCESS Oncology acquisition has been accounted for as a purchase by the Company.
The excess of the net assets acquired over the purchase price represented
negative goodwill of approximately $4,004,000. Since the negative goodwill is a
result of not recognizing contingent consideration (i.e., the contingent equity
rights), the lesser of the negative goodwill ($4,004,000) and the maximum value
of the contingent equity rights at the date of the acquisition ($34,275,000) has
been recorded as a liability, thereby eliminating the negative goodwill. The
value of the contingent equity rights of $34,275,000 was based on the
volume-adjusted weighted average closing price per share of the Company’s common
stock measured over the last seven trading days immediately preceding the
closing of the acquisition ($10.15 per share) multiplied by 3,376,855 shares,
which consist of the sum of the unissued amount of the Company’s common stock
deliverable to the ACCESS Oncology stockholders as milestone consideration
(3,372,422 shares) and to those preferred stockholders of ACCESS Oncology who
have yet to provide the necessary documentation to receive shares of the
Company’s common stock (4,433 shares).
NOTE
11 - STOCKHOLDERS’ EQUITY
Preferred
Stock
The
Company’s amended and restated certificate of incorporation allows it to issue
up to 5,000,000 shares of preferred stock, $0.001 par value, with rights senior
to those of the common stock.
Common
Stock
On June
20, 2007, at the 2007 Annual Meeting of Stockholders, the Company’s stockholders
approved an amendment to the Company’s amended and restated certificate of
incorporation increasing the shares of authorized common stock from 60,000,000
shares to 95,000,000 shares.
On March
29, 2006, the Company completed a registered direct offering of 4,500,000 shares
of its common stock to two institutional investors at $18.40 per share. Total
proceeds to the Company from this public offering were approximately $82.7
million, net of offering expenses of approximately $0.1 million.
During
2006, the Company issued 245,024 shares of its common stock, valued at
approximately $3,310,000, to AusAm, in connection with the Company’s purchase of
Accumin, which closed on April 6, 2006. See Note 6 - Goodwill.
Treasury
Stock
On
February 14, 2007, the Company’s former Chief Financial Officer surrendered to
the Company 5,973 shares of common stock in order to satisfy his tax withholding
obligation upon the vesting of 16,666 shares of restricted stock. The 5,973
shares of common stock are being held by the Company in Treasury, at a cost of
approximately $70,000, representing the fair market value on the date the shares
were surrendered.
On April
25, 2007, the Company’s former President surrendered to the Company 17,875
shares of common stock in order to satisfy his tax withholding obligation upon
the vesting of 50,000 shares of restricted stock. The 17,875 shares of common
stock are being held by the Company in Treasury, at a cost of approximately
$198,000, representing the fair market value on the date the shares were
surrendered.
Equity
Incentive Plans
The
Company has in effect the following stock option and incentive
plans.
a. The
1999 Stock Option Plan was adopted in November 1999. Under the 1999
Stock Option Plan, the Company’s board of directors could grant stock-based
awards to directors, consultants and employees. The plan authorizes grants to
purchase up to 4,230,000 shares of authorized but unissued common stock. The
plan limits the term of each option, to no more than 25 years from the date of
the grant, unless otherwise authorized by the board. The plan permits the board
of directors or a committee appointed by the board to administer the
plan. The administrator has the authority, in its discretion, to
determine the terms and conditions of any option granted to a Company service
provider, including the vesting schedule. As of December 31, 2008, no additional
shares of the Company’s common stock may be issued under the 1999 Stock Option
Plan.
b. The
2000 Stock Option Plan was adopted in June 2000. Under the 2000 Stock
Option Plan the compensation committee of the Company’s board of directors is
authorized to grant stock-based awards to directors, consultants and employees.
The 2000 plan authorizes grants to purchase up to 4,455,000 shares of authorized
but unissued common stock. The plan limits the term of each option, to no more
than 10 years from the date of the grant, unless authorized by the
board. As of December 31, 2008, up to 322,051 additional shares may
be issued under the 2000 Stock Option Plan.
c. The
2002 CEO Incentive Stock Option Plan was adopted in December
2002. Under the 2002 CEO Incentive Stock Option Plan the Company’s
board of directors granted an option to the newly-appointed Chief Executive
Officer of the Company to purchase up to 2,002,657 shares of authorized but
unissued common stock. The option has a term of 10 years from the date of the
grant. The option granted to the newly appointed Chief Executive Officer was
part of a total grant of options issued pursuant to the 1999 Stock Option Plan,
the 2000 Stock Option Plan and the 2002 CEO Incentive Stock Option Plan, to
purchase a total of 4,050,000 shares of the Company’s common
stock. As of December 31, 2008, the option granted under the 2002 CEO
Incentive Stock Option Plan has fully vested. In the event of a
merger, acquisition or other change of control or in the event that the Company
terminates the Chief Executive Officer’s employment, either without cause or as
a result of his death or disability, or he terminates his employment for good
reason, the time period during which he shall be allowed to exercise such
options shall be extended to the shorter of two years from the date of the
termination of his employment or December 24, 2012. No additional
shares of the Company’s common stock may be issued under the 2002 CEO Incentive
Stock Option Plan.
d. The
2004 President Incentive Stock Option Plan was adopted in February
2004. Under the 2004 President Incentive Stock Option Plan the
Company’s board of directors granted an option to the then newly-appointed
President of the Company to purchase up to 1,000,000 shares of authorized but
unissued common stock. The option has a term of 10 years from the date of the
grant. The option granted to the then newly appointed President was made
pursuant to an employment agreement following the acquisition of ACCESS Oncology
in February 2004. Of this option, 166,667 was to vest over a three-year period
and 833,333 was to vest upon the earlier of the achievement of certain
performance-based milestones or February 5, 2011. As part of the 2008
Restructuring, on March 26, 2008, the Company notified its President that the
Company was terminating his employment, effective April 15, 2008. As a result,
500,000 options were forfeited and, as of December 31, 2008, 500,000 options
remain outstanding and vested under this plan, and will remain exercisable until
April 15, 2010. No additional shares of the Company’s common stock may be issued
under the 2004 President Incentive Stock Option Plan.
e. The
2004 Long-Term Incentive Plan was adopted in June 2004 by the Company’s
stockholders. Under the 2004 Long-Term Incentive Plan, the
compensation committee of the Company’s board of directors is authorized to
grant stock-based awards to directors, consultants and employees. The 2004 plan
authorizes grants to purchase up to 4,000,000 shares of authorized but unissued
common stock. The plan limits the term of each option, to no more than 10 years
from the date of their grant. As of December 31, 2008, up to an
additional 835,408 shares may be issued under the 2004 Long-Term Incentive
Plan.
f. The
2007 Incentive Plan was adopted in June 2007 by the Company’s stockholders.
Under the 2007 Incentive Plan, the compensation committee of the Company’s board
of directors is authorized to grant stock-based awards to directors,
consultants, employees and officers. The 2007 Incentive Plan authorizes grants
to purchase up to 6,000,000 shares of authorized but unissued common stock. The
plan limits the term of each option to no more than 10 years from the date of
their grant. As of December 31, 2008, up to an additional 1,376,469 shares may
be issued under the 2007 Incentive Plan.
The
following table summarizes stock option activity for the years ended December
31, 2008, 2007 and 2006:
|
|
Number
of shares
|
|
|
Weighted-
average
exercise price
|
|
Weighted-
average
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
(in
years)
|
|
|
|
Outstanding
at December 31, 2005
|
|
|
8,024,652
|
|
|
$
|
4.26
|
|
|
|
|
|
Granted
|
|
|
3,699,660
|
|
|
|
14.49
|
|
|
|
|
|
Exercised
|
|
|
(824,103
|
)
|
|
|
2.41
|
|
|
|
|
|
Forfeited
& expired
|
|
|
(115,496
|
)
|
|
|
7.91
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
10,784,713
|
|
|
|
7.87
|
|
|
|
|
|
Granted
|
|
|
1,235,769
|
|
|
|
9.67
|
|
|
|
|
|
Exercised
|
|
|
(138,412
|
)
|
|
|
1.96
|
|
|
|
|
|
Forfeited
|
|
|
(544,730
|
)
|
|
|
14.48
|
|
|
|
|
|
Expired
|
|
|
(468,167
|
)
|
|
|
11.31
|
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
|
10,869,173
|
|
|
|
7.69
|
|
|
|
|
|
Granted
|
|
|
243,800
|
|
|
|
4.28
|
|
|
|
|
|
Exercised
|
|
|
(75,000
|
)
|
|
|
2.96
|
|
|
|
$
|
259,900
|
|
Forfeited
|
|
|
(1,326,214
|
)
|
|
|
10.29
|
|
|
|
|
|
|
Expired
|
|
|
(597,300
|
)
|
|
|
8.74
|
|
|
|
|
|
|
Outstanding
at December 31, 2008
|
|
|
9,114,459
|
|
|
$
|
7.19
|
|
5.6
|
|
$
|
36,678
|
|
Vested
and expected to vest at December 31, 2008
|
|
|
9,084,275
|
|
|
$
|
7.18
|
|
5.6
|
|
$
|
36,678
|
|
Exercisable
at December 31, 2008
|
|
|
7,939,549
|
|
|
$
|
6.62
|
|
5.3
|
|
$
|
36,678
|
|
The
following table summarizes information about stock options outstanding at
December 31, 2008:
|
|
Options outstanding
|
|
|
Options exercisable
|
|
Range
of
exercise prices
|
|
Number
outstanding
|
|
|
Weighted-
average
remaining
contractual
life (years)
|
|
|
Weighed-
average
exercise
price
|
|
|
Number
exercisable
|
|
|
Weighed-
average
exercise
price
|
|
$
0.10 - $ 2.14
|
|
|
4,134,319
|
|
|
|
4.8
|
|
|
$
|
1.23
|
|
|
|
4,104,319
|
|
|
$
|
1.24
|
|
3.01
- 8.98
|
|
|
660,051
|
|
|
|
7.9
|
|
|
|
7.07
|
|
|
|
249,360
|
|
|
|
6.47
|
|
9.25
- 12.81
|
|
|
1,731,350
|
|
|
|
4.7
|
|
|
|
10.62
|
|
|
|
1,560,774
|
|
|
|
10.60
|
|
13.00
- 18.06
|
|
|
2,588,739
|
|
|
|
6.9
|
|
|
|
14.43
|
|
|
|
2,025,096
|
|
|
|
14.48
|
|
$
0.10 - $ 18.06
|
|
|
9,114,459
|
|
|
|
5.6
|
|
|
$
|
7.19
|
|
|
|
7,939,549
|
|
|
$
|
6.62
|
|
Upon the
exercise of stock options, the Company issues new shares. As of December 31,
2008, 3,328,833 options issued to employees and directors, and 93,000 options
issued to consultants, are milestone-based, of which 3,203,833 options issued to
employees and directors, and 43,000 options issued to consultants, are vested
and exercisable.
Certain
employees and consultants have been awarded restricted stock under the 2004
Long-Term Incentive Plan and 2007 Incentive Plan. The time-vesting restricted
stock grants vest primarily over a period of two to four years. The following
table summarizes restricted share activity for the years ended December 31,
2008, 2007 and 2006:
|
|
Number of
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at December 31, 2005
|
|
|
—
|
|
|
|
—
|
|
|
|
|
Granted
|
|
|
100,000
|
|
|
$
|
15.30
|
|
|
|
|
Vested
|
|
|
—
|
|
|
|
—
|
|
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
100,000
|
|
|
|
15.30
|
|
|
|
|
Granted
|
|
|
195,000
|
|
|
|
10.28
|
|
|
|
|
Vested
|
|
|
(73,332
|
)
|
|
|
11.77
|
|
|
|
|
Forfeited
|
|
|
(83,334
|
)
|
|
|
15.30
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
|
138,334
|
|
|
|
10.09
|
|
|
|
|
Granted
|
|
|
3,976,906
|
|
|
|
0.33
|
|
|
|
|
Vested
|
|
|
(59,168
|
)
|
|
|
9.04
|
|
|
$
|
27,075
|
|
Forfeited
|
|
|
(73,500
|
)
|
|
|
10.19
|
|
|
|
|
|
Outstanding
at December 31, 2008
|
|
|
3,982,572
|
|
|
$
|
0.36
|
|
|
$
|
876,166
|
|
As of
December 31, 2008, 1,800,000 shares of restricted stock, which are issued to the
Company’s chief executive officer, are milestone-based, of which none have
vested.
Shares
available for the issuance of stock options or other stock-based awards under
the Company’s stock option and incentive plans were 2,533,928 shares at December
31, 2008.
Warrants
The
following table summarizes warrant activity for the years ended December 31,
2008, 2007 and 2006:
|
|
Warrants
|
|
|
Weighted-
average
exercise price
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at December 31, 2005
|
|
|
321,976
|
|
|
$
|
4.65
|
|
|
|
|
|
Issued
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Canceled
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
321,976
|
|
|
|
4.65
|
|
|
|
|
|
Issued
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Canceled
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
|
321,976
|
|
|
|
4.65
|
|
|
|
|
|
Issued
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Expired
|
|
|
(249,412
|
)
|
|
|
6.00
|
|
|
|
|
|
Outstanding
at December 31, 2008
|
|
|
72,564
|
|
|
$
|
0.01
|
|
|
$
|
15,478
|
|
The terms
of outstanding warrants as of December 31, 2008 are as follows:
|
|
Warrants outstanding
|
|
|
Warrants exercisable
|
|
Range
of
exercise prices
|
|
Number
outstanding
|
|
|
Weighted-
average
remaining
contractual
life (years)
|
|
|
Weighed-
average
exercise
price
|
|
|
Number
exercisable
|
|
|
Weighed-average
exercise
price
|
|
$
0.01
|
|
|
72,564
|
|
|
|
1.0
|
|
|
$
|
0.01
|
|
|
|
72,564
|
|
|
$
|
0.01
|
|
Stock-Based
Compensation
The fair
value of stock options granted is estimated at the date of grant using the
Black-Scholes model. The expected term of options granted is derived from
historical data and the expected vesting period. Expected volatility is based on
the historical volatility of the Company’s common stock. The risk-free interest
rate is based on the U.S. Treasury yield for a period consistent with the
expected term of the option in effect at the time of the grant. The Company has
assumed no expected dividend yield, as dividends have never been paid to stock
or option holders and will not be paid for the foreseeable future.
Black-Scholes Option Valuation Assumptions
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free
interest rates
|
|
|
2.6%
|
|
|
|
4.1%
|
|
|
|
4.7%
|
|
Dividend
yield
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Volatility
|
|
|
76.3%
|
|
|
|
68.4%
|
|
|
|
78.3%
|
|
Weighted-average
expected term
|
|
4.3
years
|
|
|
4.8
years
|
|
|
3.1
years
|
|
The
weighted average grant date fair value of options granted was $2.40, $5.69 and
$7.79 per option for the years ended December 31, 2008, 2007 and 2006,
respectively. The Company used historical information to estimate forfeitures
within the valuation model. As of December 31, 2008, there was $3.9 million and
$0.8 million of total unrecognized compensation cost related to non-vested stock
options and restricted stock, respectively, which is expected to be recognized
over a weighted-average period of 2.2 years and 2.4 years, respectively. The
amounts do not include, as of December 31, 2008, 175,000 and 1,800,000 options
and restricted shares outstanding, respectively, which are milestone-based and
vest upon certain corporate milestones, such as FDA approval of the Company’s
drug candidates, market capitalization targets, and change in control.
Stock-based compensation will be measured and recorded if and when a milestone
occurs.
The
following table summarizes stock-based compensation expense information about
stock options and restricted stock for the years ended December 31, 2008, 2007
and 2006:
|
|
Year ended December 31,
|
|
(in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense associated with restricted stock (1)
|
|
$
|
(114
|
)
|
|
$
|
1,028
|
|
|
$
|
189
|
|
Stock-based
compensation expense associated with option grants (2)
|
|
|
6,862
|
|
|
|
9,632
|
|
|
|
14,723
|
|
|
|
$
|
6,748
|
|
|
$
|
10,660
|
|
|
$
|
14,912
|
|
(1)
|
Includes
a $290,000 credit to compensation expense related to restricted stock
issued the Company’s former President, who was terminated as part of the
2008 Restructuring.
|
(2)
|
Includes
additional non-cash share-based compensation expense during the year ended
December 31, 2006 of $1,697, relating to previous grants made to a former
officer and two former directors. The Board of Directors agreed to modify
their option agreements in 2006 such that their vesting and exercisability
has been extended beyond the terms of their original
agreements.
|
NOTE
12 – INCOME TAXES
As of
December 31, 2008, the Company has U.S. net operating loss carryforwards of
approximately $253.4 million which expire from 2019 through 2028. In addition,
as of the date of the acquisition, ACCESS Oncology had U.S. net operating loss
carryforwards of $14.9 million that start to expire in December
2019.
The
Company has established a valuation allowance against its net deferred tax
assets due to the Company’s history of pre-tax losses and the resulting
likelihood that the deferred tax assets are not realizable. The valuation
allowance for deferred tax assets was $141.8 million and $118.4 million as of
December 31, 2008 and 2007, respectively. At December 31, 2008, deferred tax
assets have not been recorded on net operating loss carryforwards for certain
stock option deductions of $5.1 million. If the entire deferred tax
asset were realized, $15.9 million would be allocated to paid-in-capital related
to the tax effect of compensation deductions from the exercise of employee and
consultant stock options. Due to the Company’s various equity transactions, the
utilization of certain tax loss carryforwards could be subject to annual
limitations imposed by Internal Revenue Code Section 382 relating to the change
of control provision.
The
Company
recorded
$36,000 in income tax expense for the year ended December 31, 2007, as a result
of Israeli income tax withheld associated with the Yissum revenue (see Note
9).
No income tax expense was attributable to income from continuing
operations for the year ended December 31, 2008 and the year ended December 31,
2006. Income tax expense differed from amounts computed by applying the US
federal income tax rate of 35% to pretax loss as follows:
|
|
For the year ended December 31,
|
|
(in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Losses
from continuing operations before income taxes, as reported in the
consolidated statements of operations
|
|
$
|
(52,706
|
)
|
|
$
|
(89,270
|
)
|
|
$
|
(72,748
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computed
“expected” tax benefit
|
|
|
(18,447
|
)
|
|
|
(31,245
|
)
|
|
|
(25,462
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
benefit from state & local taxes
|
|
|
(4,869
|
)
|
|
|
(4,563
|
)
|
|
|
(8,050
|
)
|
Change
in state and local effective tax rate
|
|
|
(4,387
|
)
|
|
|
4,533
|
|
|
|
(831
|
)
|
Unrecognized
compensation deduction
|
|
|
—
|
|
|
|
7,053
|
|
|
|
—
|
|
Permanent
differences
|
|
|
523
|
|
|
|
447
|
|
|
|
1,067
|
|
Withholding
tax
|
|
|
—
|
|
|
|
36
|
|
|
|
—
|
|
Other
|
|
|
(60
|
)
|
|
|
159
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in the balance of the valuation allowance for deferred tax assets
allocated to income tax expense
|
|
|
27,240
|
|
|
|
23,616
|
|
|
|
33,276
|
|
|
|
$
|
—
|
|
|
$
|
36
|
|
|
$
|
—
|
|
The
significant components of deferred income tax expense (benefit) attributable to
loss from operations are as follows:
|
|
For the year ended December
31,
|
|
(in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax benefit
|
|
$
|
(27,154
|
)
|
|
$
|
(23,883
|
)
|
|
$
|
(36,670
|
)
|
Federal
deferred tax benefit relating to the exercise of stock
options
|
|
|
(86
|
)
|
|
|
267
|
|
|
|
3,394
|
|
Increase
in the valuation allowance for deferred tax assets
|
|
|
27,240
|
|
|
|
23,616
|
|
|
|
33,276
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2008 and 2007
are presented below.
(in thousands)
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
Deferred
tax assets/(liabilities):
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
113,752
|
|
|
$
|
93,554
|
|
Net
operating loss carryforwards (ACCESS Oncology)
|
|
|
6,128
|
|
|
|
6,128
|
|
Non-cash
compensation
|
|
|
13,528
|
|
|
|
10,980
|
|
Deferred
revenue
|
|
|
4,737
|
|
|
|
5,069
|
|
Unrealized
loss on securities
|
|
|
1,292
|
|
|
|
—
|
|
Research
and development
|
|
|
939
|
|
|
|
1,397
|
|
Intangible
assets due to different amortization methods
|
|
|
1,009
|
|
|
|
1,203
|
|
Accrued
compensation
|
|
|
299
|
|
|
|
30
|
|
Other
temporary differences
|
|
|
77
|
|
|
|
67
|
|
Deferred
tax asset, excluding valuation allowance
|
|
|
141,761
|
|
|
|
118,428
|
|
|
|
|
|
|
|
|
|
|
Less
valuation allowance
|
|
|
(141,761
|
)
|
|
|
(118,428
|
)
|
Net
deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
The
Company may be subject to audits by various federal, state and foreign taxing
authorities. The Company regularly reevaluates its tax positions and the
associated interest and penalties, if applicable, resulting from audits of
federal, state and foreign income tax filings, as well as changes in tax law
that would reduce the technical merits of the position to below more likely than
not. Unrecognized tax benefits arise when the estimated benefit recorded in the
financial statements differs from the amounts taken, or expected to be taken, in
a tax return because of the uncertainties described above. Audits of the
Company’s U.S. federal income tax returns for 2004 through 2006 were
completed in 2008. As a result, the Company’s balance of unrecognized tax
benefits was reduced from $7.05 million to $0 at December 31, 2008.
The
Company accounts for interest and penalties related to uncertain tax positions,
if any, in selling, general and administrative expense. As of December 31, 2008
the Company has not accrued any interest and penalties.
NOTE
13 – INTEREST AND OTHER (EXPENSE) INCOME, NET
The
components of interest and other (expense) income, net are as
follows:
|
|
For the year ended December 31,
|
|
(in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
1,349
|
|
|
$
|
4,550
|
|
|
$
|
6,378
|
|
Other
income
|
|
|
101
|
|
|
|
5
|
|
|
|
15
|
|
Gain
on sale of auction rate securities
|
|
|
81
|
|
|
|
—
|
|
|
|
—
|
|
Impairment
expense of auction rate securities
|
|
|
(3,196
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
(1,665
|
)
|
|
$
|
4,555
|
|
|
$
|
6,393
|
|
In 2008,
the Company recorded impairment charges totaling $3,196,000 for
other-than-temporary declines in the fair value of its auction rate securities
(see Note 3 – Investment Securities, and Note 4 – Fair Value Measurements). In
2008, other income consisted of rental income, and in 2007 and 2006, other
income consisted of rental income from a related-party that terminated in
2007.
NOTE
14 - COMMITMENTS AND CONTINGENCIES
Research
& Development Agreements
The
Company has entered into various research and development agreements
(
relating to the
Company’s development of Zerenex and KRX-0401
)
under which it is
obligated to make payments of approximately $413,000 through December 2009. The
following table shows future research and development payment obligations by
period as of December 31, 2008.
(in thousands)
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
Research
and development agreements
|
|
$
|
413
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
The table
above includes certain commitments that are contingent upon the Company
continuing development of its drug candidates.
Leases
The
Company leases its office space under a lease agreement that expires in October
2010. Total rental expense was approximately $658,000, $723,000 and $658,000 for
the years ended December 31, 2008, 2007, and 2006, respectively. The Company
recognized sublet income of $101,000 for the year ended December 31, 2008
related to office sharing agreements.
Future
minimum lease commitments as of December 31, 2008, in the aggregate total
approximately $1,056,000 through 2010. The following table shows future minimum
lease commitments by period as of December 31, 2008.
(in thousands)
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
Operating
leases
|
|
$
|
597
|
|
|
$
|
459
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
During
2004, the Company entered into a lease arrangement with its former President,
Dr. Craig Henderson, for the utilization of part of his residence for office
space associated with the Company’s former employees in San Francisco,
California. The lease was terminated effective April 15, 2008 as part of
the 2008 Restructuring. The Company has expensed $16,000, $65,000 and $49,000 in
2008, 2007 and 2006, respectively, pursuant to the terms of this arrangement,
which $28,000 was included in accounts payable and accrued expenses in the
accompanying balance sheet as of December 31, 2007. All amounts due have been
paid prior to December 31, 2008.
Royalty
and Contingent Milestone Payments
The
Company has licensed the patent rights to its drug candidates from others. These
license agreements require the Company to
make contingent milestone
payments to certain of its licensors. In
addition, under these
agreements, the Company must pay royalties on sales of products resulting from
licensed technologies.
The
Company has undertaken to make contingent milestone payments to certain of its
licensors of up to approximately $40.8 million over the life of the licenses, of
which approximately $36.4 million will be due upon or following regulatory
approval of the licensed drugs. The Company has also committed to pay to the
former stockholders of ACCESS Oncology certain contingent equity rights (up to
3,372,422 shares of the Company’s common stock) if KRX-0401 meets certain
development milestones. Of the 3,372,422 shares, 500,000 of these shares would
be payable upon achieving the first development milestone. A substantial portion
of the contingent shares would be payable to related parties of the Company. The
contingent equity rights have been recognized as a non-current liability on the
consolidated balance sheet. The uncertainty relating to the timing of the
commitments described in this paragraph prevents the Company from including them
in the table Research and Development Agreements above.
NOTE 15
– BONUS TO OFFICER
Pursuant
to his employment agreement, the
Chief Executive Officer of
the
Company was entitled to receive a one-time $2 million cash bonus due
to the achievement of a corporate milestone that occurred
, and was expensed
and paid in 2006. Of this amount, $1,000,000 was included in other
research and development expenses and $1,000,000 was included in other selling,
general and administrative expenses for the year ended December 31,
2006.
NOTE
16 – SEGMENT INFORMATION
Until
September 2008, the Company had three reportable segments, which included the
Diagnostics segment. Following the termination of the Accumin diagnostic
product, the Company now has two reportable segments: Services and Products. The
Services business provides clinical trial management and site recruitment
services to other biotechnology and pharmaceutical companies. The Products
business focuses on the acquisition, development and commercialization of
medically important, novel pharmaceutical products for the treatment of
life-threatening diseases, including renal disease and cancer, and also includes
license revenue, other revenue and associated costs.
Segment
information for the years ended December 31, 2008, 2007 and 2006 was as
follows:
|
|
|
|
|
|
|
|
(in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
103
|
|
|
$
|
52
|
|
|
$
|
431
|
|
Products
|
|
|
1,180
|
|
|
|
931
|
|
|
|
—
|
|
Total
|
|
$
|
1,283
|
|
|
$
|
983
|
|
|
$
|
431
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
76
|
|
|
$
|
(72
|
)
|
|
$
|
41
|
|
Products
|
|
|
(51,117
|
)
|
|
|
(93,753
|
)
|
|
|
(79,182
|
)
|
Total
|
|
$
|
(51,041
|
)
|
|
$
|
(93,825
|
)
|
|
$
|
(79,141
|
)
|
A
reconciliation of the totals reported for the operating segments to the
consolidated loss from continuing operations is as follows:
|
|
Loss
from continuing operations
|
|
|
|
|
|
(in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Operating
losses of reportable segments
|
|
$
|
(51,041
|
)
|
|
$
|
(93,825
|
)
|
|
$
|
(79,141
|
)
|
Interest
and other (expense) income
|
|
|
(1,665
|
)
|
|
|
4,555
|
|
|
|
6,393
|
|
Income
taxes
|
|
|
—
|
|
|
|
(36
|
)
|
|
|
—
|
|
Consolidated
loss from continuing operations
|
|
$
|
(52,706
|
)
|
|
$
|
(89,306
|
)
|
|
$
|
(72,748
|
)
|
|
|
Assets
(1)
|
|
|
|
As
of December 31,
|
|
(in thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Services
|
|
|
—
|
|
|
|
—
|
|
Products
|
|
|
3,982
|
|
|
|
16,293
|
|
Total
assets of reportable segments
|
|
|
3,982
|
|
|
|
16,293
|
|
Cash,
cash equivalents, interest receivable and investment
securities
|
|
|
22,652
|
|
|
|
64,681
|
|
Assets
of discontinued operations
|
|
|
—
|
|
|
|
87
|
|
Consolidated
total assets
|
|
$
|
26,634
|
|
|
$
|
81,061
|
|
(1)
|
Assets
for the Company’s reportable segments include fixed assets, goodwill,
accounts receivable and prepaid
expenses.
|
The
carrying amount of goodwill by reportable segment as of December 31, 2008 and
2007 was as follows:
|
|
|
|
(in thousands)
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
Services
|
|
|
—
|
|
|
|
—
|
|
Products
|
|
$
|
3,208
|
|
|
$
|
3,208
|
|
Total
|
|
$
|
3,208
|
|
|
$
|
3,208
|
|
NOTE
17 - LITIGATION
In July
2003, Keryx (Israel) Ltd., one of the Company’s Israeli subsidiaries, vacated
its Jerusalem facility, after giving advance notice to RMPA Properties Ltd., the
landlord. On May 1, 2005, the landlord filed suit in the Circuit Court of
Jerusalem in Jerusalem, Israel, claiming that Keryx (Israel) Ltd., among other
parties, was liable as a result of the alleged breach of the lease agreement. On
March 3, 2009, the Company entered into a settlement agreement with R.M.P.A.
Properties Ltd., with respect to the dispute. In accordance with the settlement
agreement, in March 2009, the Company paid the landlord a total sum of $260,000
for a full release of all claims and obligations under the lease agreement.
Accordingly, $260,000 was included in accounts payable and accrued expenses at
December 31, 2008.
The
Company prevailed in an arbitration proceeding with Alfa Wasserman concerning
certain terms of the 1998 License Agreement between Alfa Wasserman and the
Company related to the provision of data to Alfa Wasserman and consultation
regarding management of the licensed patents. An arbitration hearing was held in
October 2007 and the arbitrator issued his decision on March 25, 2008, rejecting
Alfa Wasserman’s claims that the Company was in material breach of the License
Agreement. The arbitrator determined that each party would bear its own costs
for the arbitration.
In April
2008, the Company notified Alfa Wasserman of its intention to terminate the
License Agreement. The Company offered to transfer to Alfa Wasserman all
regulatory applications as provided in the License Agreement and demanded
payment by Alfa Wasserman of 25% of the Company’s development costs associated
with sulodexide, as provided in the License Agreement. Alfa Wasserman itself
served a notice of termination of the License Agreement on the alleged grounds
that the Company is in material breach of the agreement for failing to
diligently develop sulodexide by terminating the Phase 4 clinical trial. By
seeking to terminate the License Agreement, Alfa Wasserman is thereby seeking to
avoid reimbursement to Keryx of development costs. The Company intends to submit
its claim for development costs and Alfa Wasserman’s claim of material breach to
arbitration for resolution.
In April
2008, the Company commenced an action in the U.S. District Court for the
Southern District of New York against Panion & BF Biotech, Inc. (“Panion”)
for breaching the manufacturing provisions of the March 14, 2008 Amended and
Restated License Agreement between the Company and Panion, and the implied
covenant of good faith and fair dealing contained therein. The Company sought
declaratory and injunctive relief and damages against Panion. Panion
asserted counterclaims against the Company for alleged breach of the agreement
and the implied covenant of good faith and fair dealing contained therein and
for alleged breach of fiduciary duties, and sought declaratory and injunctive
relief and damages in the amount of “at least one million dollars.” The Company
replied, denying Panion’s counterclaims. In November 2008, the parties agreed to
settle their dispute. The parties entered into a first amendment to the Amended
and Restated License Agreement by which Panion granted the Company additional
manufacturing and development rights, and the Company paid Panion $200,000 in
November 2008. Following execution of the settlement agreement and first
amendment to the Amended and Restated License Agreement, the parties entered a
voluntary dismissal of the action, including Panion’s asserted
counterclaims.
The
Company in-licensed KRX-0501 from Krenitsky Pharmaceuticals, Inc. (“Krenitsky”)
in 2005. In October 2008, Krenitsky commenced an action in the United States
District Court, Middle District of North Carolina, Durham Division, against the
Company, requesting a declaratory judgment from the court determining that (i)
the Company breached the 2005 License Agreement between Krenitsky and the
Company, (ii) Krenitsky was within its legal rights to terminate the License
Agreement for cause, (iii) the Company has no further rights or interests in the
licensed patents, and (iv) Krenitsky has no further obligations to the Company
under the License Agreement. In December 2008, the parties agreed to settle
their dispute and as a result have entered into a License Termination,
Technology Transfer and Settlement Agreement, whereby the license agreement was
terminated and certain know-how was transferred to Krenitsky in exchange for a
portion of any future license and milestone payments received by Krenitsky
related to KRX-0501 and a royalty on sales of the drug, if any. Following
execution of the Termination, Technology Transfer and Settlement Agreement, the
parties entered a voluntary dismissal of the action.
The
Company is presently engaged in an arbitration proceeding with ICON Central
Laboratories (“ICON”), the central laboratory it used for the clinical
development of Sulonex, concerning certain fees related mainly to the provision
of storage services pursuant to a series of service agreements. In March 2008,
the Company terminated the agreements. ICON is claiming that the Company owes it
$816,647 in unpaid invoices, much of which is made up of charges for annual
storage fees. It is the Company’s position that it should not have to pay for
storage fees incurred after the effective date of the termination of the
agreements, and the Company intends to vigorously defend this proceeding on this
basis, and to assert a counterclaim for a refund of the unused portions of the
annual storage fees already paid to ICON.
NOTE
18 – RESTRUCTURING
On March 26, 2008, the Company
implemented a strategic restructuring plan to reduce its cash burn rate and
re-focus its development efforts (the “2008 Restructuring”). The 2008
Restructuring, which was prompted by the negative outcome of the Company’s
pivotal SUN-MICRO Phase 3 clinical trial of Sulonex™ (sulodexide) for the
treatment of diabetic nephropathy, announced on March 7, 2008, and subsequent
decision by the Company to terminate the ongoing SUN-MACRO Phase 4 clinical
trial, was intended to conserve the financial resources of the Company and
enable it to focus its efforts on programs and opportunities that management
believed were most likely to provide long-term shareholder value. The 2008
Restructuring included a workforce reduction of approximately 50% as compared to
the Company’s workforce at December 31, 2007. Following the workforce reduction,
the Company had approximately 25 full and part-time employees.
As part
of the 2008 Restructuring, on March 26, 2008, the Company notified its
President, I. Craig Henderson, M.D., that the Company was terminating his
employment, effective April 15, 2008. Dr. Henderson remained in his position as
a member of the Company’s Board of Directors until the annual meeting in June
2008. The Company recognized a $1,569,000 credit to expense, in the year ended
December 31, 2008, related to the forfeiture of stock options and restricted
stock issued to Dr. Henderson. In addition, the Company reached a mutual
agreement with its Chief Accounting Officer, Mark Stier, that Mr. Stier resigned
effective June 30, 2008. His responsibilities were assumed by James F. Oliviero,
Vice President, Finance, who was appointed Principal Financial and Accounting
Officer on May 6, 2008.
The
following table summarizes restructuring costs that were provided for and/or
incurred by the Company during the year ended December 31, 2008:
(in thousands)
|
|
2008
|
|
|
|
|
|
Research
and development
|
|
|
|
Impairment
of manufacturing facility
|
|
$
|
11,037
|
|
Manufacturing
facility restoration
|
|
|
2,063
|
|
Severance
|
|
|
624
|
|
Non-cash
compensation
|
|
|
(1,569
|
)
|
Total
research and development
|
|
|
12,155
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
|
|
Severance
|
|
|
99
|
|
Total
selling, general and administrative
|
|
|
99
|
|
|
|
|
|
|
Total
restructuring costs
|
|
$
|
12,254
|
|
During
2008, the Company paid out $2,063,000 for the manufacturing facility restoration
and $723,000 for severance obligations. At December 31, 2008, there
were no remaining restructuring liabilities.
NOTE
19 – QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands, except per share data)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
License
revenue
|
|
$
|
199
|
|
|
$
|
327
|
|
|
$
|
327
|
|
|
$
|
327
|
|
Service
revenue
|
|
|
—
|
|
|
|
62
|
|
|
|
41
|
|
|
|
—
|
|
Other
revenue
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
|
199
|
|
|
|
389
|
|
|
|
368
|
|
|
|
327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services
|
|
|
—
|
|
|
|
14
|
|
|
|
13
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
compensation
|
|
|
(980
|
)
|
|
|
251
|
|
|
|
334
|
|
|
|
328
|
|
Other
research and development
|
|
|
30,827
|
|
|
|
4,242
|
|
|
|
2,208
|
|
|
|
798
|
|
Total
research and development
|
|
|
29,847
|
|
|
|
4,493
|
|
|
|
2,542
|
|
|
|
1,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
compensation
|
|
|
1,717
|
|
|
|
1,767
|
|
|
|
1,662
|
|
|
|
1,669
|
|
Other
selling, general and administrative
|
|
|
1,887
|
|
|
|
2,078
|
|
|
|
2,284
|
|
|
|
1,225
|
|
Total
selling, general and administrative
|
|
|
3,604
|
|
|
|
3,845
|
|
|
|
3,946
|
|
|
|
2,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
33,451
|
|
|
|
8,352
|
|
|
|
6,501
|
|
|
|
4,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(33,252
|
)
|
|
|
(7,963
|
)
|
|
|
(6,133
|
)
|
|
|
(3,693
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other (expense) income, net
|
|
|
(1,203
|
)
|
|
|
274
|
|
|
|
(622
|
)
|
|
|
(114
|
)
|
Income
taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Loss
from continuing operations
|
|
|
(34,455
|
)
|
|
|
(7,689
|
)
|
|
|
(6,755
|
)
|
|
|
(3,807
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
|
(81
|
)
|
|
|
(8
|
)
|
|
|
(86
|
)
|
|
|
—
|
|
Net
loss
|
|
$
|
(34,536
|
)
|
|
$
|
(7,697
|
)
|
|
$
|
(6,841
|
)
|
|
$
|
(3,807
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
(0.79
|
)
|
|
|
(0.17
|
)
|
|
|
(0.15
|
)
|
|
|
(0.08
|
)
|
Discontinued
operations
|
|
|
(—
|
)*
|
|
|
(—
|
)*
|
|
|
(—
|
)*
|
|
|
—
|
|
Basic
and diluted loss per common share
|
|
$
|
(0.79
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.08
|
)
|
*Amount
less than once cent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands, except per share data)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
License
revenue
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
41
|
|
|
$
|
163
|
|
Service
revenue
|
|
|
12
|
|
|
|
14
|
|
|
|
11
|
|
|
|
15
|
|
Other
revenue
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
|
12
|
|
|
|
14
|
|
|
|
52
|
|
|
|
905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services
|
|
|
32
|
|
|
|
30
|
|
|
|
28
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
compensation
|
|
|
995
|
|
|
|
1,178
|
|
|
|
735
|
|
|
|
666
|
|
Other
research and development
|
|
|
17,444
|
|
|
|
15,684
|
|
|
|
15,965
|
|
|
|
25,790
|
|
Total
research and development
|
|
|
18,439
|
|
|
|
16,862
|
|
|
|
16,700
|
|
|
|
26,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
compensation
|
|
|
2,006
|
|
|
|
1,407
|
|
|
|
1,780
|
|
|
|
1,893
|
|
Other
selling, general and administrative
|
|
|
2,115
|
|
|
|
2,354
|
|
|
|
2,062
|
|
|
|
2,610
|
|
Total
selling, general and administrative
|
|
|
4,121
|
|
|
|
3,761
|
|
|
|
3,842
|
|
|
|
4,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
22,592
|
|
|
|
20,653
|
|
|
|
20,570
|
|
|
|
30,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(22,580
|
)
|
|
|
(20,639
|
)
|
|
|
(20,518
|
)
|
|
|
(30,088
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other (expense) income, net
|
|
|
1,441
|
|
|
|
1,200
|
|
|
|
1,017
|
|
|
|
897
|
|
Income
taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(36
|
)
|
Loss
from continuing operations
|
|
|
(21,139
|
)
|
|
|
(19,439
|
)
|
|
|
(19,501
|
)
|
|
|
(29,227
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
|
(674
|
)
|
|
|
(21
|
)
|
|
|
(27
|
)
|
|
|
(34
|
)
|
Net
loss
|
|
$
|
(21,813
|
)
|
|
$
|
(19,460
|
)
|
|
$
|
(19,528
|
)
|
|
$
|
(29,261
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
(0.49
|
)
|
|
|
(0.45
|
)
|
|
|
(0.45
|
)
|
|
|
(0.67
|
)
|
Discontinued
operations
|
|
|
(0.01
|
)
|
|
|
(—
|
)*
|
|
|
(—
|
)*
|
|
|
(—
|
)*
|
Basic
and diluted loss per common share
|
|
$
|
(0.50
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.67
|
)
|
*Amount
less than once cent
NOTE
20 – SUBSEQUENT EVENT (UNAUDITED)
In March
2009, the Company’s Japanese partner, JT and Torii, informed the Company that
they had initiated a Phase 2 clinical study in Japan, which triggered a $3
million non-refundable milestone payment which was received by the Company in
March 2009.